Long-term (sustainable) investments. In spite of investors‘ widespread scepticism, their confidence in the long-term benefits of sustainable investing prevails over their perplexities. Investors seem aware of the fact that their duty to invest in an ethical manner is also an expression of their need to stay relevant. Therefore, acting in the interest of their beneficiaries is tantamount to acting to their own advantage.
“Recent research by McKinsey Global Institute has shown that companies that operate with a true long-term mindset perform better, consistently outperforming their industry peers since 2001 across almost every financial measure that matters.” 1
“Meta-studies by Mercer and the University of Hamburg and Deutsche Asset & Wealth Management8 provide clear evidence that sustainable business practices lead to lower cost of capital and equal or even better financial performance, but despite higher costs of capital, companies with poor ESG management still have sufficient access to capital and companies providing unsustainable products and services may have relatively good ESG risk management (and vice versa).” 2
According to “Sustainable Signals”, a survey conducted in 2019 by the Morgan Stanley Institute for Sustainable Investing, not only did almost 9 in 10 respondents (88%) believe that it was possible to conciliate financial gains with social and environmental impact, but they also concurred that their actions could affect climate change and that, socially, they could have positive repercussions on the indigents. The types of impact investment themes that investors showed interest for were plastic reduction (46% indicated a strong interest towards it), climate change (46% indicated a strong interest towards it), and community development (42 % indicated a strong interest towards it).
“Overall, 71% agreed that their investment decisions can influence climate change, up 17% points from 2017, and 84% among the general population agreed that their investments could lift people out of poverty through economic growth.”3
Given the evident benefits of long-term sustainable investing, investors now seek solutions that are compatible with their values. Apparently, though many companies are starting to offer an even wider array of products and services, they are still failing to incorporate goods and practices that are tailored to investors’ wants and needs. In turn, investors’ struggle to find alignment with their business priorities causes them to refrain from sustainable investing at all.
This represents a major glitch in the communication system between investors and companies. Companies, however, can align with investors’ interests by developing products which are ideally in line with their values, or at least non-conflicting with their business principles. This tactic could enable them to be the propulsive force behind the closing of the gap between investors’ basic interest in sustainable investing and their actual adoption of sustainable measures. On the other hand, the very purpose of the application of the PRIs* is to better align investors with broader objectives of society, as stated in the preamble to the PRI Principles.
*PRI = Principles of Responsible Investment
Investors play a vital role in the achievement of the goals set by 2030, and the need to meet the challenges is undoubtedly urgent. As a matter of fact, the UN Commission on Trade and Development (UNCTAD) estimated that, in order to meet the SDG goals, from 2015 to 2030, the annual budget to be spent on sustainable investments should range between US$5 trillion and US$7 trillion. Yet investors are not even remotely on track at the moment.
Out of the US$75 trillion to US$105 trillion required funds, approximately US$1.3 trillion have actually been invested in impact investments by PRI signatories. The thorny issue of insufficient money allocation could have to do with the fact that “only one in six PRI signatories (17%) report allocating capital to environmentally/ socially themed investments (e.g. inclusive finance, renewable energy, clean technology, affordable housing).” 4
Were we to examine the matter from an environmental perspective instead than from a financial viewpoint, we could argue that the demands we are imposing on the planet exceed the available resources:
“In 2016, the Global Footprint Network (GFN) estimated that our demands on renewable natural resources would need 1.6 earths to be met, and more that 80% of people now live in countries that demand more from nature than their ecosystem can regenerate. With the population forecast to reach 8.3 billion people by 2030, we will need 50% more energy, 40% more water and 35% more food.”5
Environmental risks could bring about higher costs for ecological damage repair:
“Annual environmental costs from global human activity were calculated at US$6.6 trillion in 2008, equivalent to 11% of GDP, with the top 3,000 public companies – i.e. those that make up large, diversified equity portfolios – responsible for a third of this (US$2.15 trillion).6
As far as the social risks are concerned, there are still people who do not have access to basic services such as healthcare, clean water, energy, and sanitation. Aside from the ethical implications of social inequality, it can also lead to political unrest and economic instability:
“Income inequality in OECD countries is at its highest level for 30 years23, and Oxfam estimates that the 62 richest people in the world have the same wealth as half the world’s population. This significant level of income inequality is creating a number of social stresses, including mistrust of governments and business, as well as governance and security-related issues.”7
The vexed question of a more dedicated approach to sustainable measures remains open, and the expectation that responsible investment practices will lead to increased profits must be called into question as a major catalyst for the implementation of sustainable measures.
The belief that financial returns will be produced as a result of sustainable investing bases its foundation on the assumption that advantageous turnover and sustainability are two faces of the same coin, which is certainly one of the facets of investors’ behaviour that needs inspecting.
It is not only essential to shed light on the reasons why such attitude persists, but also to discuss the solutions needed in order to meet the goals in time. Eventually, failure to meet the challenges of the SDG goals could significantly affect the value of capital markets or their potential for growth, and with that, the value of diversified portfolios.
“Undeniably, current responsible investment practices contribute to the “broader objectives of society”, but the contribution is limited and achieving the SDGs through corporate responsibility and responsible investment will require a more dedicated approach. To meet the challenges of the SDGs, responsible investment should not just look at how ESG risks and opportunities affect the risk-return profile of an investment portfolio, but also how a responsible investment portfolio affects those broader objectives of society.” 8
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