ESG IS HERE TO STAY
BY LONDON & CAPITAL
It seems everyone is a little bit more interested in sustainability these days. It’s not just the surge in electric car sales or the fact renewable energy has now overtaken coal and gas. It’s also because investing along environmental social and governance (ESG) principles has become an integral part of many investors’ portfolios.
Don’t take our word for it – the data speaks for itself. European sustainable funds broke records for inflows, assets and product development last year, according to Morningstar. ESG has not only become part of our way of thinking but also how we invest for the future.
The question is, why? For starters, there has been a growing awareness of issues such as climate change and social inequalities in the past few years, and this has translated directly into many people’s investment preferences. It’s also a matter of changing demographics and new regulatory pressures – together they are serving as a catalyst towards more sustainable approaches to investing.
The COVID-19 pandemic has also accelerated investors’ interest in sustainability issues and climate change. Climate-related funds were among the best-selling investments last year, while even more funds divested from the highest-carbon emitters. In the fourth-quarter of 2020, seven funds with a climate theme were among the top 10 to have received the largest level of assets.
Impossible to ignore
ESG previously represented a niche area of investing that was seen as sacrificing returns in favour of doing good. But all of this has changed. Sustainable investing is gaining widespread popularity for several reasons.
First, there has been a noticeable shift in the world. People are taking greater notice of climate change, rising sea levels and other environmental concerns. But there is more to it. There is increasing awareness of inequalities in society and corporate governance issues in large corporations. Alongside this, we can see a clear demographic shift in the world. Younger generations will soon be responsible for significant amounts of wealth, and they have a different vision for the future.
Then there is regulatory change. It is not just investors who are moving the needle, but governments as well. The European Union is pressing ahead with its sustainable finance taxonomy – a list of economic activities that will dictate what it deems to be green investments – from 2022. In the US, the Securities and Exchange Commission is reviewing the issue of climate-related disclosure in public company filings, which were first identified in 2010 guidance.
All of this is to say that sustainable investing is in a different place than it was even five years ago. The old notion of sustainable investing or ESG focused primarily on environmental concerns, but this is no longer the case. Sustainability is about more than a business’s immediate environmental impact – it’s also about the way it treats its employees, how it engages with society and how it is managed from top to bottom.
The bottom line is that, by looking at how a company performs on an environmental, social and governance basis, we can gain an insight into how it will perform financially. In this day and age, investors have much less patience for companies with poor environment and social records than in the past. Look at Boohoo as an example, when it emerged that there was modern slavery in its supply chain, many investors headed for the door. It’s because of this that companies with a good ESG track record are increasingly seen as stronger performers – the cleaner their track record, the better their results.
What does this mean for investors at London & Capital?
At London & Capital, our long-term approach is central to our investment philosophy. ESG-aware investing is fundamentally aligned with the key tenet – investing for the long-term, in assets with sustainability and resilience, where risks can be actively managed. Therefore, our ESG approach is folded into our investment strategy and allows our clients to engage with us, setting their own level of ESG integration. As with financial metrics, we recognise that ESG issues are dynamic, and our process will adapt over time.
If you would like to read more about London & Capital’s ESG approach, please have a look at our ESG-aware investing document here.
If you would like to discuss anything related to ESG, please get in touch using the contact form here.