The future of sustainable investing

LGT Crestone

LGT Crestone

Sustainable investing is about investing for the future. It’s about recognising that companies that aim to solve the world’s biggest problems are not only best placed to provide sustainable long-term returns but are also more resilient through periods of turmoil.

The COVID-19 crisis has put the value of sustainability into greater focus than ever before. It’s shone a spotlight on the interdependence of the economy, society and the environment, and shown the importance of building resilience in portfolios and positioning for a changing world.

On Wednesday 21 October, we invited a global panel of expert speakers to discuss the next major developments in sustainable investing, and how we can better mobilise capital towards sustainable goals. Importantly, the panel discussed how investing sustainably does not mean settling for sub-market returns, and that incorporating environmental, social and governance (ESG) factors into investing can improve long-term risk-adjusted returns for equities and preserve returns in bonds.

Our panel included:

  • Aniket Shah, Head of Sustainability and ESG Research, UBS Americas; 
  • Dr Di Winkler, CEO, Founder and Executive Board Member of Summer Foundation; 
  • Ian Learmonth, CEO of Clean Energy Finance Corporation; 
  • Olivia Albrecht, Head of ESG Business Strategy at PIMCO; and 
  • Phil Morle, Partner at Main Sequence Ventures. 

The session was moderated by Rachel Etherington and Anshula Venkataraman from Crestone Wealth Management.

Key messages from the event are:

How significant has sustainable investment become for the investment industry?

Sustainable investment has seen a tremendous uptake among investors with “more than $100 trillion of global assets under management currently aligned or signed up to the Principles for Responsible Investment”, according to Aniket Shah, Head of Sustainability and ESG Research, UBS Americas. Shah explained how ESG is impacting markets and businesses at both the micro and macro level. He described how companies that are improving their carbon performance have a lower cost of equity when they raise funds in the capital markets and that they can also borrow money in the debt markets at a cheaper level. In addition, major institutions around the world, such as the European Commission, central banks and other sovereign wealth funds, are making policy pronouncements around climate change, which will subsequently impact financial markets.

Ian Learmonth, CEO of Clean Energy Finance Corporation, discussed the deviation in Australia between the federal and state positions when it comes to climate change. While the Federal Government’s cornerstone undertaking is to reduce carbon emissions by 26-28% (compared with 2005 levels) by 2030, the states and territories have undertaken more ambitious targets - net-zero emissions by 2050. This has led to an increase in renewable energy initiatives and investment opportunities.

What trends are driving increased interest in sustainable investment?

Olivia Albrecht, Head of ESG Business Strategy at PIMCO, provided an overview of some of the major forces behind the sustainability mega-trend. From a top-down perspective, key policymakers have played their part – particularly in terms of climate risk and environmental policies. From a bottom-up perspective, consumer preferences have shifted, and investors are being pushed by asset owners to do more in relation to sustainability commitments. Importantly, in terms of the breadth and quality of environmentally related data, Albrecht believes “we are in a much better position today than where we were five to 10 years ago.” That evolution has helped facilitate the momentum in environmental and governance focused investment. However, the same breadth and quality of data are still needed for the social dimension (the ‘S’ in ESG). When looking at S&P 500 companies, less than 10% currently report on gender diversity across their employee base and less than 5% report on racial diversity. On the positive side, events such as COVID-19 and civil unrest in the US should focus investors’ attention more on these issues.

What are the barriers to mobilising more capital?

Shah highlighted two key barriers to mobilising capital – lack of policy and a reliance on fossil fuels. Firstly, despite all the advances in technology, the policy framework has not kept pace. Secondly, on climate specifically, he emphasised that “the world is fundamentally addicted to fossil fuel,” which will make the energy transition difficult. On the bright side, financial market participants are aware of the issues and have a firm grasp of what is happening in terms of climate change. In Australia, Learmonth highlighted that the challenges to additional renewable energy investment are related to the grid, but that regulators are trying to address these issues and that the potential for investors is enormous.

Where are the opportunities?

Sustainable strategies are accessible across all asset classes. Within fixed income, Albrecht explained that demand for ‘green bonds’ has outstripped supply. Green bonds are fixed income securities where the proceeds can only be used for projects that finance renewable energy or decarbonisation projects. Albrecht feels that the emergence of sustainability-linked bonds will be transformative. These are securities where the general proceeds can go towards any project but the bond’s coupon is linked to the company’s sustainability targets. Learmonth agreed that there has been strong demand for green bond issuance, as well as technology investments, and is not seeing any diminished activity in these areas.

Within real assets, Dr Di Winkler, CEO, Founder and Executive Board Member of Summer Foundation, described how she is seeing significant impact investing opportunities within the special disability accommodation market, which is an emerging market. There is a huge gap in housing needs within this market in Australia, with demand for dwellings (28,000) far outstripping supply (16,000). ”This sector is attracting a lot of interest from investors, but it is important to be cautious about what you invest in.” Winkler is hoping to see two significant changes in the next few years – firstly, that the market is led less by the National Disability Insurance Scheme (NDIS) and more by the market; and secondly, that we see demand-driven innovation based on robust data and customer insights about the specific needs and preferences of NDIS participants.

From a venture capital perspective, Phil Morle, Partner at Main Sequence Ventures, explained that there is the opportunity to create very scalable, robust business models in Australia through the use of technology, and existing infrastructure could be used to this end.

Equities provide exposure to a broad range of sectors and opportunities, including renewables and technology. Shah noted the outperformance of sustainable investments in equities. He cited a 2015 assessment of more than 2,500 individual studies, where 70% of these studies showed outperformance of sustainable investments.

What does tomorrow look like?

Morle believes that creating solutions to the world’s greatest challenges is a strong investment thesis. Over the next couple of decades, given population growth, we will need to produce twice as much food. However, 30% of the world’s greenhouse gas emissions are already being created by agriculture. Technology will play a major role in addressing these issues and, in many cases, scientists already have the answers to many of these challenges. The issue now is “working out how we mobilise capital, industry, government and policy so we can build a better world.”

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LGT Crestone
LGT Crestone

Private wealth advice for high-net-worth and ultra-high-net-worth families, family offices, and for-purpose organisations.

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