Investing in sustainable assets is increasingly becoming more popular as investors look to make a sensible and socially responsible choice in their financial decisions. This trend is likely to continue as fears of a potential financial downturn and environmental devastation increase. Investing in sustainable assets, or sustainable investing, is one way that individuals, organizations, and governments can create a more resilient and sustainable future.
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Investing in sustainable assets is about making responsible investments in financial products that meet certain sustainability criteria. This includes the assessment and integration of environmental, social, and governance (ESG) factors. Rather than looking at only a company’s financial performance, investors consider the impacts both the investment and the actions of the company have on society and the environment. Sustainability criteria may include contributions to climate change solutions, labor relations practices, pollution reductions, resource efficiency, products and services that serve a social good, and many more standards.
The financial benefits of investing in sustainable assets are numerous and rapidly growing. Sustainable investments often focus on companies offering resilient business strategies that give them a unique competitive advantage. This edge often holds up during financial downturns as sustainable companies are proactive in determining their exposure to environmental, social, and political changes and ensuring that their business strategy incorporates those relevant elements. Additionally, research has shown that smaller sustainable firms demonstrate higher returns than their larger and less sustainable counterparts. Sustainable investments also hold reduced risk. In terms of returns, studies specifically related to the ESG sector have found that the majority of asset classes yield returns that outperform their counterpart benchmarks. Specifically, Morningstar’s 2019 research found that investments in funds strongly focused on ESG characteristics on average outperform their benchmark counterparts. The report also highlighted the fact that large portfolio managers have increased their use of ESG strategies significantly and that 2018 was a record year in regards to inflows into these types of investments.
Overall, this evidence suggests that there is an increasing trend of investors choosing to invest their money in responsibly driven sustainability products. Not only are investors making more sustainable choices, both policy makers and businesses are also increasingly focused on sustainability. Many sovereign states in Europe, such as Norway and France, have now committed to fulfilling the Paris Climate Agreement and a range of other goals, and many corporations now boast new sustainability strategies as part of their corporate priorities. It, therefore, stands to reason that asset managers and pension funds are beginning to respond to the unwavering demand and drive for sustainability by instituting new sustainability criteria to their investment processes. Indeed, the ClientEarth 2018 survey of investor ESG progress found that asset managers have adapted their processes to increasing evidence of outperformance from ESG-rated companies and are now combining asset management with their capacity to mitigate climate risks as a necessary tool for enhancing long-term return potential. Although investing in sustainable assets often comes with the risk of non-compliance with specific ESG metrics, this generally pays off when the right investments are made.
Generally speaking, sustainability investments typically have lower volatility and they often buffer market drops by continuing to perform through turbulent periods. Investors should bear in mind, however, that sustainable investments are still financial decisions and should be guided by the same insight and research behind any standard investment. In conclusion, investing in sustainable assets is an increasingly popular choice as forecasts of a potential financial downturn and concern about environmental degradation increase. Sustainable investments focus on companies exhibiting resilient business strategies, often giving them a unique competitive advantage, and boasts numerous potential benefits such as a decreased exposure to risk. Through studies, it is abundantly clear that the majority of asset classes yield returns that outperform their counterparts, and that the use of ESG strategies is slowly taking precedence over traditional investments.
Although there are still non-compliance risk associated with sustainable investments, the potential rewards far outweigh the possible costs provided insightful and sound decision-making practices are exercised. Ultimately, the decision to invest in sustainable assets is up to the individual investor and the results achieved will likely depend on the selection of suitable financially viable investments that also support a company’s ESG criteria.