The demand for sustainable investment has been rising in recent years. Sustainable investing is a type of investment approach that incorporates environmental, social and governance factors while selecting and managing portfolios. This type of investment can also be known as ‘Sustainable, responsible and impact investing’ (SRI). According to ‘Global Sustainable Investment Review,’ global sustainable investment assets had increased by 61 percent in between the year 2012 and 2014. By the start of the year 2014, the value of sustainable investment assets reached a staggering amount of $21.4 trillion. During those years, the growth in sustainable investment overtook the increase in total professionally managed assets. To understand the future outlook for sustainable investment, we will be discussing the trends for this type of investment.
Trends in sustainable investment
Sustainable investors aim to achieve strong financial performance and seek to advocate for the advancements in social, environmental and governance practises.
- Investors are pressuring companies to internalise their externalities. Investors are also demanding greater transparency from companies regarding ESG issues, as demonstrated by 1,325 signatories on the Principles for Responsible Investment (PRI). As a result, investors engages in sustainable investment to ensure that companies are making decisions that benefit the environment and local community.
- Sustainable investment in the United States is growing at a faster rate than alternatives forms of conventional investments. During the financial crisis, SRI experienced a healthy growth while the increases of the majority of professionally managed assets remained flat. This implies that sustainable investment is recession-proof and it is suitable for investors who are seeking a long run steady return from their investments.
- Investors, especially business owners are beginning to recognise the effects of social and environmental impacts on their business operations and long-term viability. For instance, a beverage company must protect their source of water to manufacture high-quality products. Also, other forms of investors including property funds and venture capitalists aim to develop high energy efficient buildings for commercials and residential uses.
Challenges of sustainable investment
There is a lack of consensus when it comes to the definition of ‘sustainability.’ This can vary depending on culture, country and even amongst different people. Without a clear definition of the term, it can be hard to measure its social and environmental impact. More complications arise because institutional investors argued that sustainability is not quantifiable in financial terms. There are no fixed standards or procedures to aid the calculations for sustainable investments. The method of calculation might differ for each industry, which makes it harder to compare different types of sustainable investments.
Despite the challenges, sustainable investment will continue to grow in the future. The United Nation predicts that the population will reach 9.7 billion in 2050 and 11.2 billion by 2100. As a result, this can place more pressure on existing resources and it is imperative for resources to grow at a sustainable rate to accommodate for future generations. In response to this, sustainable investment has become more important than ever. Financial leaders and academics are being proactive in the development of innovative sustainable investments. For instance, Morgan Stanley established the ‘Morgan Stanley Sustainable Investing Challenge’ with the aim of developing high-quality investment vehicles that provide competitive financial returns and contributes to long-term sustainability. Meanwhile, The Columbia Center for Sustainable Investment’s mission is to develop practical approaches that could maximise stakeholder’s gain from sustainable investment.