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The rise and rise of sustainable investment

Investors’ growing appetite for ESG investment is driving a broad range of new products and services.

The growth of sustainable investment appears unstoppable. At the beginning of 2020, the value of sustainable investment in major financial markets globally stood at $35.3tn1, according to the Global Sustainable Investment Alliance (GSIA), and accounts for 36 per cent of all professionally managed assets across the US, Canada, Japan, Australasia and Europe. The last two years alone have seen growth of 15 per cent, the GSIA says.

Victor van Hoorn, Executive Director of Eurosif, the association that promotes sustainable investment across Europe, says that the financial system is waking up to the idea that there are real sustainability risks and that some of them may be material. He says the rapid adoption of environmental, social and governance (ESG) investments reflects the way a series of drivers have come together all at once.

“First, there is the policy agenda. We have seen significant regulation related to sustainable finance, reporting and disclosure,” van Hoorn says. “There is also the debate about whether ESG investment funds outperform. We certainly saw that at the beginning of Covid-19, although we have to question whether that is structural. Also, every single survey of retail investors reports their desire to see their savings invested in a way that aligns with their values, and that is particularly true among younger investors.”

But it’s not just retail investors who are putting their money into ESG. Research from PwC found that more than three-quarters of larger investors, including pension funds and insurance companies, intend to stop buying conventional funds in favour of ESG alternatives by 2022. PwC thinks ESG funds will see their assets increase more than threefold by 20252. Similarly, in research conducted by London Stock Exchange Group subsidiary FTSE Russell, 84 per cent of asset owners globally said they were implementing or evaluating sustainable investment strategies in 2021, up from a little over half (53 per cent) in 20183.

Guarding against greenwashing

London, as one of Europe’s most important financial centres, is naturally home to many of these funds, with investment companies listed on the London Stock Exchange (LSE) providing further opportunities. There are now 20 renewable energy-focused investment companies, for example, as well as a growing number of green exchange traded funds (ETFs).

However, as the domicile of choice for so many ESG funds, London also has a responsibility to drive high standards in sustainable investment. In mid-2021, the Financial Conduct Authority, the chief City regulator, warned of the potential dangers of greenwashing – the promotion of products by making spurious claims about their ESG credentials.

Such concerns have seen the launch of the Green Technical Advisory Group (GTAG), charged with developing a “green taxonomy” — effectively a framework that sets out what funds must do to qualify as genuinely sustainable, and how they must report on their work to investors. The initiative mirrors similar work being undertaken by the EU and in other jurisdictions worldwide.

“It is important to establish a common language to identify green investment opportunities and measure the associated growth and performance. GTAG is working closely with the UK government to develop a science-based UK taxonomy that is consistent with global best practices,” says Lily Dai, Senior Research Lead, Sustainable Investment Research, FTSE Russell and member of GTAG.

Other initiatives include Refinitiv Lipper Fund ESG scores, covering 19,000 portfolios representing $15.7tn worth of assets. The scores measure performance, commitment and effectiveness in 10 areas, ranging from carbon emissions to human rights, across environmental, social and governance pillars.

“The ESG scores are a uniquely effective way to assess performance across industries, factoring in issues such as materiality and transparency stimulation. They serve as an objective and impartial assessment of the importance of each ESG theme to different industries,” explains Robert Jenkins, Global Head of Research, Lipper and Mutual Fund Propositions for LSEG.

From a systemic perspective, the ESG movement will be judged on whether it drives a move to more responsible and sustainable behaviours on the part of the companies and organisations in which it invests — but also on whether it helps raise the funds to finance the transition towards a greener economy.

The LSE’s work provides some hope on the former. Some 101 companies worth £149bn now hold its Green Economy Mark, awarded to listed businesses that generate at least 50 per cent of their total revenues from green products and services. That represents a 36 per cent increase since the launch of the scheme two years ago.

As for closing the funding gap, there is more work to do. In the UK alone, the independent Office for Budget Responsibility prices the UK’s commitment to reach net-zero emissions by 2050 at around £1.4tn; of that total, it anticipates only £344bn coming from the public finances. Work such as the LSEG’s support for green finance fund-raising, whether through equity or bond markets, will play a pivotal role in ensuring companies make the transition to a greener, net-zero future.

FTSE Russell and Refinitiv. Two trusted names. One sustainable investment destination.

View Sources

1. Global Sustainable Investment Review 2020, Global Sustainable Investment Alliance (GSIA)
2. PwC, 2022: The Growth Opportunity of the Century, Are you ready for the ESG change? April 2020
3. Sustainable Investment: 2021 global survey findings from asset owners, FTSE Russell