The establishment of the sustainable investment goals in 2015 as a framework of achieving sustainable growth while alleviating poverty and protecting the environment has helped push growth of impact and sustainable investing across the globe.
It is sometimes believed that sustainable investment is a luxury for developed markets. But in fact it is a necessity for emerging and frontier markets. It is these countries which are experiencing the most explosive and often destructive growth and are contributing most to new greenhouse gas emissions.
Emerging economies are host to much of the world’s largest forests, wetlands and other valuable ecosystems. Protecting these environments and future proofing growth should be an imperative for the entire world. Much of the investment into developing nations flows from the West and other wealthy nations. This is why sustainable investment must be a priority for all countries not just the developed world.
The Rise and Rise of Responsible Investments
The last decade has seen a spectrum of different values aligned investing has taking off. This varies from responsible investing which adopts environmental and social governance indicators to help mitigate risk, to impact investment which seeks opportunities to make a profit and a positive social return. Impact investments are now reckoned to total USD228 billion, a huge amount, but still tiny when compared to all global investments. Also much of this value is tied up in developed markets, the need for scaling up these figures across emerging economies is obvious.
This success has given hope that economic growth can be decoupled from the degradation of the environment. The emergence of new technology such as solar panels, electric vehicles and water filtration systems give hope that living standards can be improved without increasing carbon emissions or pollution.
There is also a realisation that the economics of power and energy have reached a tipping point as renewable energy has become investable without subsidies and that the current model of growth cannot continue. But this could be a rather optimistic outlook. Tropical forests continue to be destroyed and climate breakdown is already bleaching coral reefs, melting glaciers as well as increasing the incidence of extreme weather events such as hurricanes, wildfires and storms. More inaction now, will bring greater pain in the future.
Despite advances much of the world’s economy and new business investment in developed and emerging economies is based on the old model, fossil fuels usage, destruction of natural habitats and growth at all costs.
Fossil fuel industries such as oil majors, the Chinese coal sector and other polluting industries continue to maintain their grip on much of the world’s economy and governments in terms of lobbying and political influence.
Bulge Bracket Banks
However there is change afoot across multinational corporations. Big finance is starting to back low carbon projects with enormous sums. Morgan Stanley pushed US$ 16 billion into renewables and clean tech and US$20 billion into green bonds last year demonstrating the increasing appeal of sustainability in the corporate sector.
In the past it was assumed that incorporating Environmental, Social and Governance (ESG) factors into investment would reduce returns. That no longer holds true as studies demonstrate that sustainable investments can match or outperform standard investments.
Companies very often receive an ESG rating from an agency like a financial risk rating. There is also evidence that workers and investors are more willing to work for a company that promotes and backs sustainability. What is not yet clear is whether sustainable investments can continue their trajectory and become a global norm or will they continue to be a niche used by a committed minority. Much will depend on the ability of governments to create a policy environment that helps sustainable investment and of course the behaviour of consumers in choosing companies and products that comply with ESG standards.