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October 21, 2021

World leaders assemble in Glasgow next month for a critical summit on climate change

hand holding green leaf

The UN Climate Change Conference (or COP26 as it’s also known) aims to halt humans’ destructive impact on the planet.

We’re not doing enough to stop dangerously high temperature rises this century. Not changing course could mean more extreme weather events, rising sea levels and more strain on the world’s resources.

So, the pressure is on. Countries need to reinforce commitments to cut greenhouse gases, come up with tangible emission-reduction targets, and agree to fund climate initiatives of more than US$100 billion a year.

Having COP26 on our doorstep reminds us just how much sustainability is now part of the global conversation, taking in the public, politicians – and investors.

Sustainability is inevitable

 

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Interest in investments incorporating analysis of Environmental, Social, and Governance (ESG) factors has risen massively over the last couple of years. According to Bloomberg Intelligence, ESG assets could reach as much as US$53 trillion by 2025 – that’s a third of global assets under management.

Responsible investing – fund management dedicated to ‘doing good’ by excluding assets that harm the planet or holding securities that make a positive difference – is moving to the mainstream. And it’s forcing change at the very top. Earlier this year, investor pressure forced Exxon Mobil to add three directors to its board who are devoted to driving down the company’s carbon footprint.

Debunking the myth that ESG means compromising on performance

Despite its growing popularity, there’s still a pervasive myth that ESG and sustainable investing involves a trade-off between financial returns and investors’ principles. However, more fund managers now realise the two can be on a par. Nearly 80% of asset managers who took part in Redington’s latest sustainable investment survey, now expect ESG integration to add to financial performance.

We’re seeing increasing evidence that this is possible. Research from Morningstar, an investment industry tracker, showed that over the course of a decade six out of 10 sustainable funds performed better than their non-ESG equivalents.

Of course, this doesn’t mean a sustainable fund is guaranteed to outperform – no investment is ever a sure thing. But it does show being responsible doesn’t mean having to compromise.

It’s an opportunity, not a threat

How can sustainability help your investment portfolio?

On the one hand, it’s protection. Focusing on ESG allows investors to avoid companies with unsustainable business models. With COP26 in mind, just looking at the threat of climate change, analysing whether a business is too carbon-intensive, or the impact of water scarcity or flooding, sits alongside scrutiny of more standard financial metrics. It’s an extension of the due diligence fund managers consider every day.

But sustainable investing also opens up new opportunities. Focusing on ESG allows investors to explore new technologies, or even whole industries. The shift to a ‘net-zero’ world is leading to expansion of clean energy sources, electric transport, and the creation of a ‘circular economy’ that cuts out waste and pollution.

A bigger part of our conversations

As we said back in June, ESG is now becoming a much more important part of what we do.

At Sutherland Independent, we’re committed to promoting positive outcomes where possible in our investment range, without sacrificing the opportunity for growth or increasing underlying risk.

October 21, 2021