(Illustrations: Rachel Salazar)
(Illustrations: Rachel Salazar)

MoneyJanuary 20, 2022

How sustainable investing came of age

(Illustrations: Rachel Salazar)
(Illustrations: Rachel Salazar)

Among the hundreds of ‘sustainable’ investment options now available, ‘impact investing’ has recently broken through as an even more responsible option. How have all these options made an impact on how we invest?

Although it might seem like a modern phenomenon, the roots of sustainable investing actually run a lot deeper than most of us may think. But while modern investors aren’t the only ones to prioritise religious or moral values in their financial decisions, it wasn’t until the mid-20th century – as those emboldened by the civil rights and anti-war movements of the 60s and 70s demanded an ethical alternative to the funds already on offer – that the investment industry truly came on board. That era would lead to the establishment of the world’s first sustainable mutual funds, slowly yet surely proliferating in number as the years went by – and as issues like climate change and global inequality introduced new moral quandaries for investors. 

Despite its long and storied history, mainstream acceptance of sustainable investing – broadly defined as the process of incorporating environmental, social and governance (ESG) factors into investment decisions – hasn’t been easy to come by. Even after organisations such as the United Nations began to formally encourage investing with an ESG slant in the early 2000s, much of the world’s capital continued to gravitate indiscriminately toward whatever could produce the biggest returns. Some dismissed sustainable investing as little more than a niche fad, while others believed it meant sacrificing a successful investment strategy for admirable – yet ultimately costly – goals. 

(Illustrations: Rachel Salazar)

Over time, however, sustainable investing as we know it has proven to be more popular than its sceptics could’ve ever dreamt. Since 2008, the number of available sustainable investment funds is estimated to have more than tripled, with recent years seeing a particularly rapid growth in funds with an ESG focus. According to a 2021 report from Morningstar, assets in Australian sustainable investments increased 66% over the year from June 2020, while a BNP Paribas survey of institutional investors in the Asia Pacific last year also found that 15% of respondents reported ESG as being central or a necessity to their investment strategy – a number which is expected to jump 37% in the next two years.

There are a lot of reasons why, after all this time, sustainable investing finally managed to achieve mainstream adoption (the growth of younger investors, who prefer to invest in alignment with personal values, for example). One of the most significant, however, is that despite initial concerns sustainable investing would lead to poorer performance, that hasn’t necessarily proven to be the case. Instead, studies have shown there to be no correlation between sustainable investing and negative returns, with some even finding it performed better than traditional investing methods. 

“What’s become clear in the last 10 or 15 years is that including positive impact investments hasn’t been at the cost of performance,”  says Shane Solly, portfolio manager and research analyst at Harbour Asset Management. “Historically, people have thought ‘well there’s a cost involved and it’s going to reduce my returns’. But what our research shows is that over time, there isn’t a cost involved and that actually, we think there’s a better outcome in terms of the returns that investors receive being just as good, if not better.”

In fact, rather than sustainability and returns being mutually exclusive outcomes requiring investors to choose either or, many are realising now that as the world increasingly demands progressive change from our businesses and leaders – cleaner energy, fairer wages, more diversity, less waste – sustainable investing can actually be an opportunity rather than a burden on returns. 

In a few years time, large scale environmental, economic and demographic forces are set to fundamentally change our world. With two billion more people estimated to be living on Earth by the year 2050, demand for food, water and energy will drive the need for innovative improvements in areas like housing, healthcare and transportation. These are all things we need to find sustainable solutions for sooner rather than later – and all things providing an abundance of opportunity for long term investment growth.

(Illustrations: Rachel Salazar)

We’ve started to see this in the form of impact investing which is when investors actively seek to create social and environmental benefits in addition to generating financial returns. Impact investing goes beyond simply excluding investments in harmful industries (such as coal, gambling or tobacco) by investing in companies making a positive difference. A number of major private equity firms across the globe have launched impact funds in the last few years, with similar funds also gaining traction here in New Zealand as well, most recently with the launch of Harbour Asset’s Sustainable Impact Fund

“I think over the last five years or so, it’s become much more mainstream to take the next step [from excluding negative impact investments] and actually invest with the aim of creating a positive outcome,” says Solly. “As investors, we can influence whether a company has a sustainable approach to the environment or whether they engage with a social conscience. That’s the power that we have as investors – to push for a positive outcome.”

With the conduct of companies under closer public scrutiny than ever before, investors are also realising the risks of investing in firms with poor ESG credentials. A record of exploitative labour practices, for example, can have disastrous effects not just on that company’s reputation, but also its profits, revenue and market value. As a result, adopting “responsible” values is rarely just a nice-to-have anymore, but an important part of a financially responsible strategy for investment in the long run as well. 

“Digitisation, demographics, decarbonisation: these things are going to happen regardless of whether the economy is good or bad, and businesses that are positioned to benefit from these changes have really got a tail wind behind them.” 

“For those that don’t – if they don’t change – the cost of doing business is going to go up. Businesses that still burn coal for industrial processes, for example, are eventually going to run out of their social licence to operate. They can’t grow anymore, which is why they need to find alternatives if they want to survive.”

While the oil and gas industry’s massive year in 2021 compared to ESG stocks might suggest otherwise, it’s important to keep in mind that these things take time. Sustainable investing isn’t always going to pay off overnight, but in time, it can often be worth the wait. Investing in New Zealand’s electricity generators or technology and healthcare stocks like Fisher & Paykel Healthcare, for example, are just some instances of a medium-to-long term ESG investment strategy paying off, says Solly. “Retirement and aged care facilities like Summerset and Ryman have also been great investments, although not so much recently with Covid-19. But that’s why you have to be in it for the long term – five to 10 years’ time.”

There’s only so long companies can make short term profits at the expense of their environment, their community and their people. Those who ignore their responsibilities risk their own long term survival – the public know this, and luckily, large numbers of investors seem to know this as well. There’s a wave of capital currently flowing into positive, purposeful investing globally, and with experts predicting millions of dollars more to flow in over the few years, it’s safe to say that rather than the passing fad it was once dismissed as, sustainable investing seems to be here to stay.

Harbour Investment Funds are issued by Harbour Asset Management. Our Product Disclosure Statement is available at harbourasset.co.nz. This does not constitute advice. See harbourasset.co.nz/terms-and-conditions

Mad Chapman, Editor
Aotearoa continues to adapt to a new reality and The Spinoff is right there, sorting fact from fiction to bring you the latest updates and biggest stories. Help us continue this coverage, and so much more, by supporting The Spinoff Members.Madeleine Chapman, EditorJoin Members

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