Wealth Management
But does green, sustainable or impact investing mean a less profitable outcome for investors? Well, there is now a large body of research proving that social aims and financial gains can go hand-in-hand.
“
Investors are more
focused than ever on “net zero”, that is massively reducing emissions by the mid-century through the phasing out of coal, switching to renewables and speeding up the switch to electric vehicles. Investments such as innovative battery technologies, green hydrogen projects and renewable infrastructure financing are big on investors’ radars. According to Morningstar, investments in sustainable funds reached $477.4bn in the first nine months of this year, compared to $366.6bn in the whole of 2020. Finance has become a central focus of COP26. Financial institutions are pledging to become carbon neutral and it has also highlighted the role that private investment can play in decarbonizing the economy. The profile of investing with an ESG (Environmental, Social, and Governance) or SRI (Socially Responsible Investing) mindset has finally gone mainstream.
Morgan Stanley’s 2019 ‘Sustainable Reality’ concluded “We found that sustainable funds provided returns in line with comparable traditional funds while reducing downside risk. What’s more, during a period of extreme volatility, we saw strong statistical evidence that sustainable funds are more stable”. And in the GIIN Perspectives: Evidence on the Financial performance of Impact Investments: “Impact investors seeking market rate returns can achieve them. Across various strategies and asset classes, top quartile funds seeking market-rate returns perform at similar levels to peers in conventional markets. In many cases, median performance is also quite similar.” Investors need to be aware however and carry out their due diligence when it comes to finding the right fund. This is mainly due to the exploitation of the green movement and potential ‘greenwashing’ of funds. Boring Money’s Sustainable Investment Report found that greenwashing was one of the biggest concerns for financial advisers when it comes to ESG. Seven in 10 (69 per cent) said it was a concern for their business, with one in five (20 per cent) saying they were very concerned about the risk, and half (49 per cent) saying they were somewhat concerned.
more information about how environmental, social and governance factors are incorporated into their investment processes. In response, the Treasury has published a roadmap outlining future standards for environmental reporting to “weed out” greenwashing and support the transition to a greener financial system. Until clear benchmarks or standards exist, we recommend carrying out due diligence on any sustainable investment, not only to ensure its’ credibility but also to be confident that it aligns with the personal objectives of the investor. Look at the fund strategy and methodology. They should always be very transparent. For example, the strategy at Boundary Capital is that ‘we only invest in high growth private technology companies that will positively impact millions of lives’. That strategy statement and how it fits with an investor’s motivations should be an investors first filter. The second filter is the methodology. The best methodologies are ones which generate actual values in their process, so allowing different types of investments to be compared on a level playing field. The key point here is to find funds with clear scientific methodologies and avoid ones where subjectivity can creep in. So, with clear objectives and a bit of homework, the UK is providing strong investment opportunities that target the same returns with less volatility than traditional investments whilst meeting personal responsible agendas. Investors really can have their vegan cake and eat it.
The main issue is there is no set of central standards for sustainable or green investments leading watchdogs to call for a set of clear credentials. “We can’t let this greenwashing persist and risk the flow of much-needed capital to help secure our futures,” Nikhil Rathi, chief executive of the UK’s Financial Conduct Authority, said at COP26. The FCA has recommended that investment funds labelled as sustainable should carry “concise and accessible” language and disclosures for investors. They also want asset managers to provide
Dan Somers, Managing Partner of Boundary Capital Source: 1 https://www.morganstanley.com/ideas/sustainableinvesting-competitive-advantages
2 https://thegiin.org/research/publication/financialperformance
3 https://www.boringmoneybusiness.co.uk/reports/ sustainable-investing-2021/
9
