It’s hard to ignore the siren call to prevent the deepening degradation of our planetary home. Or to remain unmoved by those who continue to live in extreme deprivation across the globe.

As a result, many consumers worldwide are adopting more sustainable behaviours. Across North America, Europe and Asia, 83% believe it’s important or extremely important for companies to design products that are meant to be reused or recycled1.

Compared to five years ago, 72% said that they’re buying more environmentally friendly products and 81% said they expect to buy more over the next five years.

This trend is increasingly becoming evident in the investments space too. The International Finance Corporation, the private sector arm of the World Bank, estimates that global investor appetite for sustainable investing is as high as US$26trn2.

This burgeoning investor preference for socially and environmentally motivated investment strategies can be partly attributed to generational wealth transitions. Accenture estimates that in North America alone at least US$30trn will be transferred over the next three decades from Baby Boomers to Generation X and Millennials3.

These younger investors are increasingly making investment decisions that consider the impact on society. Millennial investors are also twice as likely as others to invest in companies that incorporate Environmental, Social and Governance (ESG) practices. The shifting priorities of investors has not gone unnoticed.

In 2011, only 20% of S&P 500 companies were providing sustainability reporting to the market but, by 2018, this had risen to 86%. Over a period of only seven years, concern for sustainability has gone from being the exception to the rule4.

Sustainability and profits go hand in hand

In fact, sustainable investing is not just a ‘nice to have’, it is a key driver of financial returns.

  1. Companies that are environmentally conscious, have strong socially responsible values and uphold good governance are more likely to create long-term value than those that don’t. It is these businesses with positive working cultures, who treat their staff well and are interrogating the sustainable impact of their operations, who are most able to attract top talent, therefore benefitting from higher levels of knowledge-based intellectual property.
  2. In today’s world of 24/7 news, companies are increasingly concerned about how their business is perceived by regulators, competitors, customers and even by potential employees. Robust corporate governance reduces the probability of a negative tail-risk event, which can lead to a lower cost of capital and a higher valuation for the business. The cost of bad publicity or regulatory sanctions are so huge that companies that proactively address reputational and regulatory risk material to the operation of their businesses are in a far better position for long-term growth and value creation than companies that don’t.

A plethora of research supports the core thesis that sustainable investing makes financial sense. For example, in a recent analysis, MSCI found that higher-scoring ESG companies have higher profitability, lower tail risks, lower market sensitivity and higher valuations5.

Alongside financial strength, these are precisely the characteristics that should allow a business to better weather a market storm, the likes of which have been seen in the Covid-19 market turbulence6. As billions have flown out of conventional funds, those targeting positive social and environmental outcomes have continued to attract inflows.

In 2019, nine of the biggest US ESG mutual funds outperformed the S&P 500 Index, with seven of them beating their market benchmarks over the past five years5. With global markets now in bear-market territory for the first time in more than a decade, early Morningstar analysis has found that at an aggregate level, sustainable equity funds have outperformed traditional funds on a relative basis6.

This is to be expected according to a 2019 white paper, which found that ESG funds tend to be more resilient during downturns7. Put simply, sustainable investing is the smarter way to invest. It makes sense that a company with strong ESG practices is in a position to adapt more quickly to changing environmental and social trends, use their resources efficiently, have engaged and productive employees and, in the longer run, face lower risks of regulatory fines or reputational damage.

A company’s ESG credentials aren’t only an important source of information that can reveal critical investment risks; they also demonstrate long-term elements of a company’s health and sustainable value that short-term stock price movements do not. Between the coronavirus pandemic and climate change, it is difficult to imagine investors returning to their old ways and ESG-prescient investing being just a passing fad.

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Source: Morgan Stanley Research; Bloomberg

 Business as a force for good

The likelihood and impact of climate change is the most threatening risk to global prosperity over the next decade, according to 800 economic experts surveyed in the World Economic Forum’s 2020 Global Risks Report7. You only have to look at the Australian bushfires in early 2020 to see that the speed and severity of climate change and resulting social and economic consequences are devastating. So much so that we need to channel capital into what some would argue is the most effective medium we have to harness human ingenuity: the market.

Unparalleled in its ability to spur transformational innovation, a dynamic market economy can be a powerful agent for change, allowing the system to filter through solutions identifying the most radical technological breakthroughs that have the greatest potential for material success.

The vanguards of the future

The benefits of machine learning and the associated gains in sustainability are only possible through the advanced shrinkage of silicon nodes. This improves both the price and performance while reducing materials used. ASML is the world’s only supplier of Extreme Ultra Violet photolithography systems – the technology critical to semiconductor manufacturing and continued node shrinkage. This places them at the vanguard of this fourth tectonic shift in computing.

Driven by improving processing power, lower memory costs and the roll-out of 5G, advanced technology such as the Internet of Things and cloud computing are now possible. The adoption and widespread use of these technologies offer endless opportunities to advance global sustainability. This includes tracking air quality to identify pollution sources, using smart grid solutions to allow greater efficiency in renewable energy solutions, utilising machine learning for quicker drug discovery, and using predictive analytics in meteorology to chart the likelihood of natural disasters or in epidemiology for better outbreak monitoring.

The world is now engulfed in a healthcare crisis unlike any other in the last 100 years. The coronavirus pandemic has rattled stock markets, paralysed the global economy and will likely profoundly change the world as we know it.

It is in the nadir of this unique time in history that we look to those at the forefront of science and technological advancement for innovative solutions. The traditional three-phase process for drug development is being rapidly accelerated with the help of AI and sharing of data across the world. Johnson & Johnson is one of the companies trying to develop a vaccine in a substantially accelerated timeframe. In deeply uncertain times, the ability to act fast and be nimble is always a priority.

This kind of problem-solving adaptation is needed across industries to address the myriad challenges of our time. This includes, but is by no means limited to, environmental damage, water scarcity, the rising cost of healthcare, antimicrobial resistance, food security and the transition to a low-carbon economy.

Capital markets’ unique ability to act

The United Nation’s Sustainable Development Goals (SDGs) provide 17 targets identifying universal rights for humanity and critical areas that must be met to end poverty, protect the planet and ensure peace and prosperity for all by 20308.

Addressing any one of the UN’s SDGs will unlock extraordinary economic opportunities for knowledge-based companies that can give solutions and this will be seen across all areas of the global economy. The UN Global Compact estimates that to achieve its global goals, US$2trn annually will need to be invested.

Further to the market’s realisation of the economic value of sustainable investing, we have an immense opportunity to use the power of business for profit and for good. Holding more than US$200trn, capital markets have the ability to achieve the SDGs in a way that public and philanthropic efforts are unable to match.

As investors, we have an important role to play in allocating capital to propel companies of exceptional financial quality, led by high-calibre, long-term and forward-thinking management teams with significant capacity for innovation and radical thinking. It’s our responsibility to uphold high ESG standards with clear policies on all material ESG issues, including environmental management, human rights and renewable energy. Investing sustainably in companies that are taking transformational strides in innovation that directly link to positive SDGs may be the best chance we have.

Article: Maya Tabaqchali – Junior Portfolio Manager at Barclays Private Bank – Sources and references

  1. Global Consumer Sustainability Survey, Accenture Chemicals, 2019
  2. Creating impact – the promise of impact investing, IFC, 2019
  3. The “greater” wealth transfer, capitalizing on the intergenerational shift in wealth, Accenture, 2012 
  4. 86% of S&P 500 Index® companies publish sustainability/responsibility reports in 2018, GA Institute, May 2019
  5. The link between ESG and performance, Robeco, January 2019
  6. Foundations of ESG investing, MSCI, November 2017
  7. Sustainable equity funds are outperforming in bear market, Morningstar, March 2020
  8. Global risks report, WEF 2020
  9. Sustainable Development Goals, UN Global Compact, January 2019