Offshore wind has been one of the biggest winners in sustainable investment. In November 2020 the European Commission announced a plan to increase wind output from 12GW today to 300GW by 2050 (European Commission, 2020)

21/5/2021

The Rising Importance of Sustainable Investment and How It Is Growing

In recent years, to tackle the negative economic impact caused by climate change, a higher degree of importance is being placed on sustainable investment and corporate social responsibility (CSR). This is seen most commonly through the financing of investments in environmental goods and services to reduce environmental damage, financing public policies aimed at mitigating the damage done to the environment, and creating financial instruments in order to accommodate green investments.

‍Sarah Gordon, the CEO of the Impact Investing Institute, offered a stimulating discussion on the Money Maze Podcast in May 2020 on the rapidly growing sector. The episode covers the reasons behind the increased focus on sustainable investment, the ways in which it can be encouraged, and limitations it currently faces, which we will further delve into.

Why has sustainable investment come to the forefront of conversation? Simon Brewer, the show’s host, highlights that “85% of millennials want investment directed towards sustainable and responsible investing.” The “anger and activism” surrounding environmental, social and governance (ESG) topics creates a momentum for growth in the sustainable investment industry and has allowed a fast-paced push in its agenda. While activism and support further the significance of sustainable investment, the impact of more responsible investment can be seen in the materiality, regulation and client demand.

Materiality is the growing understanding of the impact ESG factors have on investment value and encourages the inclusion of these factors to better manage the risks in investment analysis. This is referred to as ‘ESG integration’. The awareness of ESG’s has resulted in client demand in greater transparency pertaining which investments their funds lie in. Sarah Gordon describes policy makers as being “increasingly aware of the role of mobilising private sector capital towards social and environmental goals” which is seen in the growing number of policy changes since the mid 90’s.

ESG policy interventions over the last two decades have increased exponentially (PRI, 2019)

The benefits gained from responsible investment are key drivers in its growth. They can be split into financial value and non-financial value. The financial value gained by ESG-driven capital allocation includes reduced risk, both in the long-term and short-term because the improvement to sustainability internalises the externality generated by the ESG issue. For example, The Impact Investing Institute, in partnership with the Green Finance Institute and the London School of Economics’ Grantham Research Institute on Climate Change and the Environment, have developed their Green+ Gilt (a sovereign bond) in order to tackle the climate change problem. The lower risk results in lower share price volatility, making the shares more stable, resulting in higher returns. The non-financial value is shown through a reduction in ESG related issues including; reduced waste, better employee relations, and lower corruption. These changes improve the workplace environment for stakeholders.

The limitation lies within the difficulty in assigning financial or monetary value to the positive and negative impact behaviours caused by sustainable investment. Some indices used to measure the impact include DJSI World, EcoVadis and FTSE4Good Index, but the long-term goal would be achieving international convergence in measuring and monitoring standards.

Despite the increased importance and awareness around sustainable investment, many need guidance to navigate the industry. The Impact Investing Institute aim to tackle this issue by encouraging “investment that delivers a positive social and environmental benefit alongside a financial return”. They do this by increasing awareness, providing research driven evidence and data, developing and implementing sustainability reporting standards, working with policy makers and educating institutional investors and policy makers by delivering programmes such as their communications programme, policy and advocacy programmes.

By Shree Ramesh, a Money Maze Podcast Ambassador. Shree is an Economics undergraduate student at the University of Aberdeen. In her spare time she enjoys playing tennis, going on hikes with her friends and eating at new places.

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