Demand for sustainable or environmental, social and governance investing continues to skyrocket, offering wealth management an important chance to adapt to the climate crisis.
Even effective sustainable investing, which already proves all too uncommon, is not enoughIn the face of increasingly common wildfires, floods and deadly heatwaves, such adaptation will be crucial for ensuring Earth’s continued ability to support our civilisation. The alternative will affect everything, including our investments.
However, even effective sustainable investing, which already proves all too uncommon, is not enough. Non-market climate initiatives regenerate the planet in ways that elude markets alone, and they can make an immediate impact. No market mechanism exists for suing polluters, protecting rainforests or providing data on deforestation in our supply chains.
In the absence of government intervention, not-for-profit organisations present the most powerful non-market climate opportunities. In doing so, they provide a critical complement to sustainable investing that better mitigates climate-related risks.
For most financial advisers, the news that global sustainable investing assets now total $35.3tn (£25.8tn) came as no surprise. A recent survey found that nearly half of UK advisers believed their clients would like to begin investing sustainably. New investors in particular have driven this trend – 73 per cent prefer investments that benefit people and planet.
The growing popularity of ESG, however, has brought increasing scrutiny into its efficacy. Advisers may have been surprised to hear green finance expert Sasja Beslik’s remarks at a recent webinar. Addressing the effects of sustainable investing, Beslik asserted that "the current state of the world is that we are not actually making any tangible improvements".
The research backs up Beslik’s pessimism. A September analysis of 281 US-domiciled sustainable equity funds found that only four had a positive impact across any of the environmental sustainable development goals. Another report analysed the views of 90 chief executives and chief investment officers among asset owners and asset managers with a combined AUM of $34.5tn. It found that: "There is currently no clear line of sight between climate investing and its impacts."
ESG funds are not enough
ESG faces a more fundamental challenge, though. Even if sustainable funds delivered impeccably on all their promises, they wouldn’t be enough to tackle the climate crisis. And that means they aren’t enough to mitigate climate-related risks to our investments. There are certain issues that markets alone cannot address.
Certain invaluable climate initiatives do not generate financial returns, and so they fall beyond the reach of sustainable investing. These initiatives include planting trees, protecting whales and accelerating clean energy to the impoverished. Governments might ideally assume responsibility for projects like these. But time and again, governments have proven themselves incapable of significant climate action at speed.
Not-for-profit organisations, on the other hand, take swift and serious action all the time, and they solve problems that market initiatives like ESG cannot address on their own. In fact, they are a critical complement to ESG.
We call climate not-for-profits ‘regenerative investments’. While not-for-profits do not generate wealth, they regenerate the planet and thereby protect wealth. Therefore, while they do not deliver financial returns, they deliver another kind of returns: the protection and enhancement of the biosphere. All our investments are less risky when the biosphere is protected.
Tackling the climate crisis will require creativity and innovation. Pairing sustainable investments with today’s best regenerative investments offers one such innovation, moving investors much closer to effective action. By responding to ESG’s limitations, investors begin to create a symbiotic relationship between the economy and the environment: their investments protect the planet, and the planet protects their investments.
Certain asset managers are already offering products that incorporate allocations to not-for-profits. In doing so, they are anticipating the growing importance of this new approach to wealth management.
AXA Investment Managers, for example, allocates 5 per cent of management fees from its impact strategies to social charities. BlackRock allocates 5 per cent of management fees from its Liquid Environmentally Aware Fund (Leaf) to carbon offsetting and contributes annually to World Wildlife Fund (WWF). TT International, on the other hand, allocates one-third of management fees from its Environmental Solutions Fund to environmental charities.
While ESG has ample room for improvement, ironing out all of its inadequacies will not extend its fundamental sphere of influence.
Climate not-for-profits pick up where sustainable investing leaves off. In an age of political paralysis, not-for-profits provide the non-market climate solutions that regenerate the planet today and secure our investments for tomorrow.
Yan Swiderski is executive trustee and co-founder of the Global Returns Project
