As sustainable investing becomes mainstream, where are the opportunities?

New whitepaper from CAMRADATA

Although Covid-19 brought the world to a standstill, and the initial shock led to fears around the progress of sustainable investing, sustainable funds hit a record high of $1.25 trillion (as of the end of Sept 2020), with Europe passing the $1 trillion milestone, according to Morningstar data[i].

CAMRADATA’s latest whitepaper on ‘Sustainable Investing’ seeks to discover sustainable investing opportunities for investors as the biggest transfer of generational wealth in history (c.$60 trillion) takes place over the next couple of years, with millennials in particular watching this space and deploying capital accordingly.

The whitepaper includes insights from Aegon Asset Management, Kempen Capital Management, The Investor Forum, Isio, Redington, RPMI Railpen and Tobacco Free Portfolios who all attended a virtual roundtable hosted by CAMRADATA in January.

The report highlights that financial models have traditionally failed to adequately capture ESG risks and in turn, ESG issues will continue to drive future market trends.

Sean Thompson, Managing Director, CAMRADATA said, “ESG is here to stay – as evidenced by last year’s inflows. In the first five months of the pandemic alone, there were more inflows into ESG funds than over the previous five years.

“But beyond the inflows of 2020, what will be closely watched this year is sustainable investing at the federal level. After the enforcement of environment protection hit a 30-year low with the Trump administration, President Joe Biden has started the process of re-joining the Paris Agreement.

“This could cause a tipping point along with commitments by China, the EU, Japan and South Korea. But while the move is welcomed at a grassroots, municipal, state and international level, young people will be watching, and calling out any violations. Our panel explored the issues and considerations for sustainable investors this year.”

One key discussion point was if there was enough data available for sustainable investors, with some saying that despite increasing volume, there was inadequate data. Others were worried about information overload and too much data.

The panel also discussed the need for asset owners and asset managers to focus more on health, in particular in relation to tobacco holdings.

Here is a round up of key sustainability issues for investors, and what it means to be a sustainable investor in 2021.

Key takeaway points were:

• Companies and asset managers need to collectively get better on the voluntary disclosure and guidance frameworks that underpin ESG reporting.
• Metrics help shareholders and analysts to understand how far a company adheres to its purpose but it is often the largest companies that have the most resources to supply data on sustainability.
• Lateral engagements mean that best practice can be disseminated throughout a sector, with greater results. If the leaders in a sector set an example, the rest will follow.
• One long-term investor said they look decades into the future. Society is against tobacco; is more and more against fossil fuels, and is now recognising the negative effects of alcohol, demonstrating that over the long term sustainability considerations will impact the financials.
• Ethical factors and ESG factors are distinct concepts that might or might not coincide. One panellist said ethical is often linked to reputation, whilst ESG is about the extent to which financial outcomes can be shaped by governance and sustainability.
• Good managers articulate clear firm wide ESG goals and then apply them consistently across their entire fund range
• Another panellist said that if a portfolio manager can’t explain how their fund’s ESG integration fits into their firm wide objectives and stewardship priorities, then the fund will not receive a good ESG rating.
• Issues that investors will focus on this year include social justice and diversity, stewardship and the new Stewardship Code, and decarbonisation of portfolios.
• One panellist said they would be running training workshops for client-facing consultants on all matters ESG, and another that they would be encouraging asset owners, beneficiaries and assets managers to understand the UN Tobacco Control Treaty, signed and ratified by 180 countries.
• A final comment was on the merits of engagement, with one panellist hoping that enhanced stewardship disclosures in 2021 would provide much more transparency on both the scale of, and impact from, engagement.