After all the upheaval of 2020, you might be forgiven for thinking environmental concerns and green investments have slipped off the radar for investors.
On the contrary, sustainability is set to be one of the biggest themes for investment in 2021. If anything, the pandemic has drawn more attention to the changes people want to see in society and the world at large, and the importance of safeguarding the future of the planet.
The dramatic drop in carbon emissions during early lockdowns in 2020 only served to highlight the work that still needs to be done to avoid the most serious effects of climate change, and people are increasingly looking to companies to act in a way that contributes towards the greater good.
Combined with continued policy change and growing interest in sustainability among younger investors, this has led to an increased focus on environmental, social and governance (ESG) factors in investments, i.e. green investments.
Not just a nice-to-have
There’s a commonly-held belief that sustainable investing, or green investments, is a niche activity that always comes at the price of lower returns – but evidence suggests otherwise.
According to investment manager Fidelity, stocks with higher ESG ratings actually outperformed those with lower ratings from January to September 2020, with better returns in every month apart from April.
And research suggests companies’ ethical performance may be a strong indicator of their future financial performance, with a study from 2019 showing an investment strategy based solely on ESG metrics could be used to predict higher returns.
A combination of regulatory change, political pressure, technological advancement and shifting public attitudes all mean that ESG is no longer the fringe activity it once was. It’s entered the mainstream, and firms should be looking to integrate it into all of their investment decisions.
This year, attitudes towards environmental issues could continue to shift on a global scale. In the US, President Joe Biden has re-joined the Paris climate agreement from “day one” of his presidency, and aims to reach net zero carbon emissions by 2050.
Meanwhile, China’s government announced last year it is committing to achieve carbon neutrality before 2060 – a significant step for a country that produces 26% of the world’s CO2 emissions.
And towards the end of the year, focus will be on the UK as it hosts the COP26 climate summit, which was originally set to take place in Glasgow in November 2020 but was postponed by a year as a result of coronavirus.
The investment industry is already responding by making sustainability a priority. A survey by BlackRock found that investment firms around the world plan to double their ESG assets under management by 2025, with 88% saying climate-related risks are their top sustainability portfolio concern.
Integrating ESG into your firm
If you haven’t already given serious consideration to how sustainability fits into your investment process and the products you offer, it’s now vital to do so.
More clients will be looking for assurance that ESG and green investments is something your firm takes seriously, and they might want to know more about your processes. They’ll also expect to receive information on the environmental impact of their investments, not just their financial performance.
The challenge for many firms is accessing the right data, and analysing it effectively.
ESG data tends to be reported inconsistently across different companies and industries, and smaller businesses in particular tend to lack the resources needed to measure and report information such as carbon emissions.
More than half (53%) of respondents to the BlackRock survey said this was their biggest barrier to adopting sustainable investing. As the technology used for data collection develops over time, however, the quality of information available should improve with it.
A report from Deloitte also notes that advanced data analytics such as AI and alternative data could be used by investment managers to uncover information that might otherwise be unavailable – potentially even helping to identify companies that are about to put new, environmentally-friendly technologies in place but haven’t announced it yet.
These fields of analytics are likely to continue developing over the next few years, giving firms more opportunities to build ESG into their service and meet their clients’ changing expectations.