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Conscious Investing: New Finance is Supporting Sustainability

Ziryan Aziz investigates how money is being used to fund innovations in clean energy and technology.

How would you feel if you discovered that your money was being invested, against your knowledge, into a company or project that was completely against your values? What if your money supported a fossil fuel company, or palm oil plantation?

For many investors, the idea of investing into sustainable and ethical businesses and projects is mired by a long-standing belief that in order to invest ethically and sustainably, one must expect to sacrifice their returns, or invest with high levels of risk.

But this may no longer be the case. According to data from the Global Sustainable Investment Alliance, in 2019, a record of US$30 trillion was invested into sustainable finance. This is doubled compared to how much was invested in 2012, and represents a growing trend amongst millennial investors who are looking for returns other than purely finance ones.

How Well Do They Perform?

What drives most people to invest into businesses, ideas, and projects is the promise of positive returns, namely, a return of more money than what they originally put in. The risk of losing money can have the opposite effect in deterring people from investing.

Sustainable finance today appears to be overcoming yesterday’s concerns, as Research from the Morgan Stanley Institute for Sustainable Finance has found that investments offering an environmental, social and governance (ESG) impact could aid investors in achieving above-market returns, as well as offering comparatively low risks. These risks were low when compared to traditional funds, and there was a 20% smaller downside deviation in periods of global market instability.

As a whole, sustainable indexes such as the FTSE4Good UK Index, which is composed of companies with strong ESG profiles, has been out-performing traditional, non-sustainable and unethical indexes over the last 10 years, according to Willis Owen, an investment platform. Groups such as ii ACE 40 Investments, from the website Interactive Investor, provide a grouping of ethical funds that adopt a sustainable Avoids, Considers, Embraces (ACE) approach. ACE 40 funds have proven to provide a positive performance over five years.

In October 2020, the first UK green investment was a success, as the council for West-Berkshire received a £1 million ESG impact investment aimed at funding projects with the local Wildlife Trust, developing cycleways and installing solar panels on district buildings. The Leader of the West Berkshire council Lynne Doherty said that she’s "very pleased that this innovative way of funding the delivery of our Environment Strategy has had such a strong uptake from local people", and is confident that it is a step in the right direction to help the council become Net-Zero in the upcoming decade.

The Future of ESGs

The reason for this newfound success, as well as the relatively low risk of these investments, is up for discussion. Some argue that recent success can be attributed to the fact that ESG investments aren’t traditionally tied to the sectors such as energy and resource extraction, and thus aren’t as susceptible to fluctuating prices in the global market.

Others argue that given there isn’t a solid criterion for what makes an impact investment, it may not always be clear whether it is the investment itself which is going to have the ethical or sustainable impact, or if it’s an ethical or sustainable company which is going to receive the investment. If there is a lack of transparency and clarity in the fund, or if it isn’t clear who the recipient of the investment is, it is possible that a non-ethical, non-sustainable industry may benefit from investments in their project that meets a marginal criterion for having an ESG impact.

What should also be taken into consideration is where most ESG investing is taking place. The biggest source of ESG funds and investing currently is within the European Union and the United States. From the data of a 2020 ESG Distribution Study by Kurtosys Systems, the future looks bright for Europe, as European investing currently outmatches U.S. ESG impact investing by a margin. This lead shouldn’t be much of a surprise, given the EU’s goals of cutting greenhouse gas emissions by 55% by 2030, and the demand this has created for more ESG investments.

The United States may also continue to ride the wave of ESG investing, as President-Elect Joe Biden has pledged a ‘Clean Energy Revolution’, and has promised that the U.S. will re-join the Paris Climate Agreement under his administration. These factors should, in theory, be a catalyst for greater sustainable investment opportunities.

Overall, the future of ESG investing appears to be positive in a world that is transitioning its economies and cultures towards sustainability and ethical practices. Whilst this is a small step on a long and uncertain path, it is a step in the right direction, and a step towards ever-increasing possibilities and opportunities to spend our money in ways which will protect rather than compromise the interests of people and the planet.


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