The efficacy and motivation for sustainable investing is beginning to grow amongst global investors, with real and quantifiable financial implications. Once seen a niche segment for ideological investors, the incorporation of sustainable considerations into investment decisions is now becoming a mainstream phenomenon and wealth managers must be well placed to advice their clients.
- Attention on sustainability as a thematic investment choice is increasing as investor motivations expand from ESG values-based to both regulatory and investment themes.
- A growing amount of evidence and research suggests companies that effectively manage ESG risks and opportunities demonstrate higher levels of long-time business performance.
- There are more opportunities than ever before for investors to align their financial and sustainability goals across their entire portfolio, rather than a stand-alone investment allocation.
Key issues and challenges:
- The roundtable discussion opened with a brief outline of what leading experts consider sustainable investing to consist of in practice, and what it means from a financial perspective for end-clients.
- Delegates agreed that sustainable investing combines traditional investment approaches with environmental, social and governance insights, and that there is a growing appetite for such solutions amongst their client base.
- The discussion moved swiftly on to the key drivers behind the growing demand for sustainable investments.
- Beyond investors’ value-based concerns, another demand-side driver is the growing pressure of regulatory and governance polices that have come into effect across both global and regional bases. For example, Article 173 in France requires asset owners to disclose information on their exposure to climate risks in what was the first-ever investor climate-reporting law.
- Furthermore, participants were briefed on BlackRock’s view of how to incorporate sustainable investing solutions for end-clients. Through the identification of environmental, social and governance insights, BlackRock noted the importance of integrating such insight and data into the investment process. Nevertheless, delegates were keen to understand more about whether ESG risk is worth the price.
- The conversation subsequently shifted to a discussion on the financial performance of companies that effectively manage ESG risks and opportunities. The experts explained that research indicates that companies with strong ESG profiles exhibit stronger cash flows, less idiosyncratic risk, and have higher valuations due to a lower susceptibility to systematic market shocks.
- In turn, participants agreed that the wider market, including institutional investors and individual asset owners, are adopting a variety of sustainable strategies to achieve their desired investment outcomes. Similarly, delegates observed that the ever-increasing supply of ESG investment solutions is predominately in response to growing end-investor appetite, and is not being driven by intermediaries in the wider fund market.
- Wealth managers that need to meet this increasing demand from clients should look to understand how to approach ESG, examine portfolio exposures and determine the right solution needed to meet the client expectations of each individual client.
- Finally, the conversation shifted briefly to the issue of how to position sustainable investment opportunities with end-clients. Some delegates noted that such a conversation is only likely to arise during the on-boarding phase when clients specify any investment exclusions they require, with a more comprehensive follow-on conversation after that.
- Nevertheless, end-clients who may prefer to advance a specific cause or construct their investments in a sustainable way are able to align their portfolios with ESG, thematic, and impact investments.
Conclusions and soultions:
- Sustainable investing can provide an additional perspective for investors to meet their investment outcomes from a both a financial and sustainable perspective.
- Gaining exposure to sustainable investments does not necessitate a trade-off with financial market returns. There is a growing consensus that sustainable investing is compatible with achieving financial outcomes.
- There are now more opportunities for investors to gain exposure to sustainable investment solutions than ever before. The key for wealth managers is to better identify when to open a conversation with clients about sustainable investments.
Expert: Amelia Tan, BlackRock Sustainable Investing