Sustainable investing has become a growing area of interest for investors in recent years, with many suggesting the ‘rise of the millennials’ is a key driver of the shift in attitudes.
Another reason could be the ‘sustainable investing’ description now allows for a broader remit – meaning investors see it less of a niche area. This is helped by events such as Good Money Week promoted by The UK Sustainable Investment and Finance Association, starting October 30, which aims to raise awareness of this area of investing.
Philippe Zaouati, chief executive of Mirova, the responsible investment subsidiary of Natixis Asset Management, points out: “There is no common definition to sustainable investing. It includes any strategy that incorporates environmental, social and governance (ESG) consideration.”
ESG issues that could fall under sustainable investing include traditional ethical approaches, such as exclusion, as well as ‘norm-based’ screening; ‘Best in Class’; thematic issues; engagement and voting; and impact investing, says Mr Zaouati.
The changing attitude is being felt by investment institutions, with the UN-supported Principles for Responsible Investment (PRI) now holding more than 1,500 signatories representing in excess of $60trn (£48trn) in assets under management.
Matt Christensen, global head of responsible investment at Axa Investment Managers, says: “Prior to 2006, early adopters drove demand for what were, at the time, niche strategies. During the era of ethical investing, investors largely adopted solutions based on screening. This changed around the time the PRI initiative launched in 2006.
“The debate shifted to the potential consequences of ignoring ESG considerations following events such as the 2007 sub-prime crisis and the 2010 Deepwater Horizon scandal, which led to the wider acceptance of ESG factors as a risk-management framework.”
The growth of this approach is highlighted by research from Heartwood Investment Management that shows 25 per cent of advisers surveyed had seen increased demand for ethical investment options in the past few years but only 43 per cent were satisfied with the range of strategies on offer.
Services are on the increase. Morningstar has launched a global Sustainability Index Series – indices exposed to companies with high standards of sustainability – which follows the launch of its Sustainability Ratings earlier this year.
Fatima Khizou, manager research analyst at the data provider, notes: “Sustainable investing no longer targets a small group of investors but rather the wider investment community. ESG considerations have become more [widespread]. Depending on a funds’ mandate, ESG criteria will be either at the heart of the process or an additional measure.”
She points out: “It remains crucial to understand how each management team is approaching the concept. Some may choose to solely look at companies that are exhibiting strong ESG characteristics, while others may opt for investing in companies that provide solutions to sustainability challenges. Each approach will lead to different biases and result in a specific risk/return profile.”