Alastair Wainwright of ISS Market Intelligence explores the shifts of attitude and action when it comes to sustainable investing.
It certainly feels like the world is on the cusp of change. The global pandemic has upended our lives in many ways and has brought, and accelerated, change in many ways. Globalisation has become increasingly apparent.
As the world changes so does the investment industry and so do the opportunities presented to investors. The speakers I heard and the conversations I had at FundForum International were exciting – and not just because it was great to talk to so many people face to face for the first time in two years! I was lucky enough to chair day one of the Sustainable and Impact Investment Forum where I learned about the innovation and opportunities in sustainable investment from both the supply and demand sides of the investment industry.
Investment and innovation go hand in hand
Sustainable, or ESG, investment has developed quickly in the past four years as both government and the investment industry prioritised its importance. Investors have moved beyond the familiar ‘exclusion’ ESG strategies, although they still dominate in asset terms, to tackling the practicalities of a transition toward a greener and fairer society.
So, how does the industry contribute to transition? Road, rail, sea and air transport are all major causes of pollution but remain essential. We can’t stop using them, but we can invest in the technology that reduces their carbon output. We don’t want to stop building roads, but we can invest in companies that build and maintain roads in a greener way. We can invest in airport operators that are changing their operations to reduce pollution and improve their local environment. We can invest in property developments that improve resident’s day to day lives – access to light, green spaces, childcare and home working space. We can invest in companies that offer a diverse workforce greater opportunity to succeed.
Does the investment industry make a difference? The answer is a resounding yes.
Electric vehicles present a multitude of infrastructure and development investment opportunities. The movement away from the internal combustion engine requires superfast charging stations to be built and battery technology to be improved to make long journeys viable. Car manufacturing plants need to be redesigned and rebuilt to move mass production away from the combustion engine and into electric vehicles. The transition to electric vehicles presents investment opportunities in the initial funding of these projects as well as the continued maintenance of new global infrastructure.
Does the investment industry make a difference?
The answer is a resounding yes. Critics of the asset management industry will tell you ESG investment is just a new strategy to charge active management fees and fight back against the rise of passive investing, and that may be true of some asset managers, but the investment industry has funded innovation and change for decades and that continues with sustainable finance today.
By redirecting capital toward sustainable projects, the asset management industry can change corporate strategy and government policy. Perhaps corporate strategy is easier to influence with the cost of capital, but it was the bond market that forced the EU to act in 2012 and support Greece, Portugal, Italy, and Spain. Governments have been slow to issue green bonds, but they are finally on that path – the UK government’s first green bond issue was over-subscribed by 10 times and one of the goals of COP26 is for developed countries to issue at least $100 billion of climate bonds annually.
Investors want to engage with companies and government policy makers, not force their hand. Investors want their voices heard in boardrooms and at government tables, they want to go beyond proxy voting and meet with companies and governments to influence ESG strategy – the investment industry has the collective power and influence to enable such engagement.
The alternatives industry is providing further tools to investors. If you believe in a transition to green energy you can construct a long/short strategy that is long green energy solutions and short fossil fuels. Private equity and private debt markets are also providing uncorrelated, long term investment opportunities in less liquid projects and developments.
A watershed for sustainable investment
The Covid pandemic has provided a watershed moment for innovation and discovery. Developments in home working and communications come together with a desire to improve our environment and society. Just as the investment industry funded, and profited from, the industrial revolution it will fund the move toward a greener and fairer society today. The ESG debate has moved on from whether an investor must choose between return or environmental impact and is now concerned with whether investors want to participate in the next technological revolution.