IN what has been a very turbulent year for investment markets, sustainable investing has stood out as a beacon of consistent returns and capital inflows, and the positive results have gone some way to dispelling some of the myths that have previously been associated with this type of investment.
Historically, investors who wished to invest in accordance with their beliefs or convictions would be steered towards strategies such as ethical investments, which use negative screening to exclude those sectors and companies that are perceived to be harmful to the environment, or detrimental to society – the so-called sin sectors such as armaments and gambling.
Cynics have long said that in order to invest in line with your beliefs or conscience, the quid pro quo was that you had to sacrifice some degree of financial return, or that ethical investing was simply a bull market luxury that does not stand up in times of market volatility.
But the events we’ve seen during 2020 have conclusively proven that this is not the case, with socially responsible equity indices outperforming standard equity indices by significant margins.
On a year to date basis to December 22, the MSCI World Socially Responsible Net Total Return Index rose 16.6 per cent compared with the standard MSCI All Country Net Total Return Index, which gained 13.3 per cent.
This out-performance has led to a surge in demand for sustainable investment strategies. Even during the Covid-19 market correction in February and early March, investment inflows into these strategies remained strong and have subsequently accelerated. Investors have realised that it is indeed possible to make financial gains and align investments with their personal values.
Data has shown that companies with a higher environmental, social and governance (ESG) score tend to be less prone to bankruptcies and earnings downgrades, as higher prudence towards ESG risks helps to protect them from scandals and can improve innovation and productivity.
At the other end of the spectrum, German car-maker Volkswagen, which had the lowest possible governance rating, has paid more than $30 billion in fines and seen its share price fall following the diesel emissions scandal.
As investor interest has increased, we have also seen a rise in the number of investment options available. Globally, the issue of green bonds has increased annually over the last five years and as at the end of September, the total market capitalisation for the global green bond market was more than €650bn.
The market received further good news when it was announced that the NextGenerationEU €750 billion Covid-19 recovery plan would be 30 per cent financed by green debt. Green bonds are a good example of impact investing where the proceeds of the bond are exclusively allocated to new and existing projects with positive impacts on the environment.
We believe the Covid-19 crisis has reinforced demand for sustainable investments, serving as a reminder of how fragile our systems can be to unfamiliar shocks. And while issues such as global warming are at the forefront of investor and consumer attention, other areas are equally important.
The Covid-19 pandemic has highlighted the critical importance of biodiversity and social values – shining a spotlight on how companies and governments tackle discrimination and inequality. Loss of biodiversity is a significant factor in the emergence of some of the recent viruses, which means it is vital we encourage companies to invest in and closely monitor their supply chains. By doing so, we can go some way to ensure that issues such as deforestation and natural habitat degradation are eventually eliminated.
These are all issues that are not going to disappear overnight and it is only through ongoing, concerted efforts by consumers, governments and investors alike that we will be able overcome them.
:: Jonathan Dobbin is managing director senior adviser at Julius Baer International in Northern Ireland.
