Investments into sustainable assets that benefit both people and the planet are rapidly increasing in popularity. A 2020 report by the Global Sustainable Investment Alliance found as much as 36 percent of all assets under management were broadly identified as sustainable in Europe, the U.S., Canada, Japan, Australia and New Zealand.
Whilst the preference for this approach is nothing new, intensifying societal pressures, stricter regulation and sustainability-linked financial performance are but a few of the factors fuelling its rapid adoption.
As an investor, it can be easy to get caught up in the conversations around sustainable investing. But what does sustainable really mean and how does it translate into an investment portfolio?
First, it's important to take a step back to understand how sustainable investments are classified and the benefits and risks of investing this way. This can help investors set their own sustainable investment priorities.
What does "sustainability" mean to you?
Most investors pursuing sustainable assets have investment priorities beyond financial goals. Whether it's investing in net-zero carbon assets or backing companies with gender-balanced leadership structures, investors are increasingly integrating environmental, social and governance (ESG) factors into their investment approaches and aligning their portfolios to positive ESG outcomes.
Investors can achieve maximum impact on matters important to them by focusing on three key principles: avoiding harm, prioritising good business practices and contributing to solutions. Mapping sustainability expectations with these principles can help investors build a clear roadmap for their sustainable investing journey.
“We put in time at the outset because we want a clear and defined understanding of what 'sustainability' means to a client," says Andrew Maxwell, director, RBC Wealth Management in the British Isles. "In the past, portfolios have been centred around risk and return. But by gaining a proper understanding of a client's ethical views, we can construct an appropriate investment solution and periodically measure and track it against their values – that's what client's find valuable."
Integrating sustainability into an investment strategy can be complex, particularly when each investor has a different take on what "sustainability" means. “Regulators, companies and even governments have different understandings of what is sustainable," explains Stephen Metcalf, head of Sustainable Investing at RBC Wealth Management in the British Isles and Asia.
For some, avoiding certain assets is a priority. This is known as "negative screening" or a “blunt tool approach," Maxwell says. Other investors proactively seek out investments with a positive impact on the environment, such as investing in renewable energy.
Another approach is to become an "agent of change," to invest in a company transforming its business model to help enable its transition. One example is Ørsted, a Danish power company. Previously a state-owned oil and gas company, it transformed into a leading wind turbine manufacturer.
Adopting an "agent of change" strategy can have a greater aggregate impact on energy transition than simply not investing in such assets, “because, as in this case, you are helping a company reduce its carbon emissions while adding a renewable energy company to support the world's energy transition efforts," says Maxwell.
Understanding a client's priorities is vital throughout the entire investment journey because it's often an iterative process. “Investment preferences change. Conversations that bring nuance and continually develop an investment strategy are essential," explains Maxwell.
What do you really care about?
Do you care about social justice as much as the environment? Or aquatic life above life on land? Either way, once priorities are identified, you can work with your wealth managers to build an appropriate portfolio and understand the sustainable attributes and cumulative impacts of their investments.
Each investment subset carries different opportunities and styles of risk. Speaking to a wealth planner about their financial goals helps investors to understand which sustainable investment opportunities are right for them.
“Working closely with our clients to understand their values enables us to build a portfolio that grows and flexes as their preferences change, which is critical as the sector matures and new classifications are introduced," says Metcalf.
The trends driving the need for sustainable investments are here for the long-term. Sustainable investing has matured beyond the stage of simply having an ESG fund, "it's a constantly evolving area", says Maxwell.
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