The maturity of responsible investing

It was widely reported in the media last year that ESG investing is going out of style and is being replaced with newer trends. However, there are credible grounds for believing that responsible investing isn’t just a fly-by-night trend, and that we should be investing in sustainable opportunities.

Some examples include:

• the Intergovernmental Panel on Climate Change documenting how global temperatures continue to rise
• unacceptably high rates of biodiversity loss, according to the United Nations Environment Programme
• increased levels of extreme poverty found in research by the International Monetary Fund 

These issues are unlikely to be resolved overnight and there’s still a need for investing in change. Looking at the transition to sustainably sourced energy as an example, this could benefit both the environment and investors. The International Energy Agency estimates that $2.8 trillion will be invested into clean energy in 2023, across both fossil and sustainably sourced fuel.

Asset managers have a fiduciary duty to clients to ensure that all investment decisions are made with their best interests in mind. A survey by The World Economic Forum found the leading risks for private-sector risk managers in their two and 10-year horizons are all ESG-related. Therefore, factoring ESG into investment decisions plays an important role when reducing downside risks within varying time frames.

We are mindful there has been a loss of trust in recent years due to a lack of classification and transparency within sustainable investing, resulting in investors falling victim to greenwashing. Greenwashing is the marketing of sustainable activity where the ESG efforts have been overstated. The broader ESG investing space is evolving and there are efforts to address and rebuild investor trust.

Regulators are guiding the need for standardisation, classification, heightened transparency and parameters surrounding greenwashing, especially with regard to investment advice.

The UK’s Financial Conduct Authority released its Sustainability Disclosure Requirements in November last year. One significant change will be evaluating which ESG-related labels, if any, are applicable to investment products. 

This will benefit investors by cutting through the noise, rebuilding trust in responsible investing and enabling more informed investment decisions.

With this all in mind, we believe sustainable investing is very much alive and, as it matures, will undergo a necessary evolution to build trust. We continue to believe it’s an important vehicle in mitigating downside risks and taking advantage of new opportunities.