28 September, 2021 / Comment
Five sustainable investing myths debunked
By Sophie Kennedy, joint-CEO, EQ Investors
EQ Investors' Sophie Kennedy addresses concerns that stop investors taking the ESG plunge
Although the number of investors who would like to make a positive impact to society and the environment continues to grow, we still encounter misconceptions that prevent some from taking the plunge. Five common myths associated with impact investing are:
All sustainable investment approaches are the same
There are a variety of ways in which sustainability considerations can influence investment mandates and portfolio management. Three common approaches are:
- Ethical investing, which negatively screen to exclude industries based on controversial behaviour, such as tobacco.
- ESG investing introduces information on how well companies manage relevant operational environmental, social and governance factors into the investment decision-making. Investment strategies can integrate this information differently. Common approaches may overweight or set inclusion thresholds based on company ESG performance, relative to peers. But this approach usually overlooks the analysis of companies’ products and services.
- Impact investing focuses on maximising the absolute positive impact associated with investments. Investment strategies can do this by positively targeting sustainable themes like clean water, renewable energy or accessible healthcare. This approach puts a very strong emphasis on companies’ products and services and the solutions they bring to the many challenges we face.
Sustainable investing will sacrifice investment returns
Incorporating ESG factors into investments can actually help boost financial performance. Businesses that demonstrate greater operational sustainability and sustainable products and services can perform better.
Evidence indicates the positive correlation between sustainability and performance holds both at the corporate accounting, and investment performance level because risk is better controlled. Additionally, ESG leaders invest more in research and development, foresee future risks and plan ahead to remain competitive.
Impact investing also offers the opportunity to capture the potential upside from competitive advantage, sustainability trends and legislative support. Impactful companies are those that have turned the largest societal challenges into profitable business opportunities. These companies benefit from the growing global demands for their products and services, greater regulatory support and from avoiding reputational and stranded asset risks. A recent example is the EU pandemic recovery package that demarcates special financial support for green economic activities.
Sustainable investing is too risky
Although many high-impact investments can be in more volatile markets (such as emerging markets), real opportunities exist across all asset classes, and risks vary between these. For example, social housing investments can provide reliable government backed-income streams while providing significant societal benefits. Water utilities prevent industrial wastewater from polluting natural ecosystems and provide defensive investment characteristics.
Therefore, portfolio managers can adhere to normal risk categories and create portfolios for different ‘risk appetites’ of private clients, as well as tailor these to sustainability preferences.
Impact is a narrow investment universe
There is no single defined investment universe for impact investors. Investor preference defines the opportunity set by deciding on risk, return and impact theme targets. The amount of companies eligible for investment can depend on the impact or ESG standards set by investors.
This universe is also expanding. As much as investor interests are turning to sustainability, companies’ business models are too. For example, in 1999 Impax Asset Management had an investment universe of 250 companies which generated more than 50% of their revenues from environmental solutions. This universe has now grown to about 1,400 companies. The same would apply to the healthcare universe, the financial inclusion or education universe.
Sustainable investing cannot make a positive impact
When investing a client account through a positive impact mandate, the output of companies and that associated with an investment can align with the client’s values.
Even in listed markets, allocating equity capital or investing in bond issues of businesses that create positive sustainable impact, will support their share price and provide easier access to capital thereby producing a license to operate. Using capital to invest for positive impact will signal to the market that such non-financial impacts are valued and nudge laggards in the right direction.
Additionally, sustainable investors will use their company relationships to engage boards on any sustainability weaknesses and thus create change. They are also able to use voting rights to back or block strategic decisions that concern the company’s ESG performance.
The dual objective to create financial and sustainability outcomes means the investment reporting that private clients receive should not solely cover the financials. For example, we have created an interactive impact calculator that shows the investments’ associated positive impacts, such as renewable energy generated or hours of education provided. We also transparently disclose alignment with the UN Sustainable Development goals, and how portfolios are aligned to climate change scenarios.
A part of the Mark Allen Group.