This is part one of our insights on sustainable investing. Stay tuned for part 2: the Advent of Greenwashing.
Sustainability. ESG. Impact Investing. These are just some of the buzzwords that have surfaced in the wake of a drive by investors globally to put their money where it will count. While most see it as having a vital role to play in preserving our planet and ensuring the prosperity of future generations, it’s important to remember that as with every type of investment, there are challenges to face when it comes to sustainability investing.
This form of investing has slowly taken over the scene; in 2020, ESG assets globally were worth $35 T in 2020, according to the Global Sustainable Investment Association and Bloomberg Intelligence’s base-case scenario. Assuming a 15% growth, they could be worth over $41 T by end-2022 and reach $50 T by 2025.
In terms of exchange-traded funds (ETFs), cumulative inflows for ESG has surpassed Bloomberg Intelligence’s $121 B mark in 2021 (based on a bull-case scenario); in fact, inflows were recorded at over $75 B in the first half of last year and it has continued to grow at a rapid pace, expanding for more than 38 consecutive months.
As such, Bloomberg predicts that assuming a 35% growth, $1.3 T should be entering such ESG ETFs the world over by 2025, with cumulative assets reaching more than $360 B in 2021.
In fact, sustainable investing set records in 2021. According to Morningstar Inc., in 2021 money held in sustainable mutual funds and ESG-focused ETFs rose globally by 53% to $2.7 trillion; additionally, a net $596 billion flowed into strategy.
Interestingly, while Europe has dominated the space thus far, the US is the market that is actually leading the drive for sustainable investing.
A VC’s Role
As sustainable investing picks up its pace, an increasing number of investors, including venture capitalists, are seeing the merits of it, as some of the ESG factors are also economic factors that will fuel the world in the long run. Additionally, the COVID-19 pandemic has accelerated the need to invest sustainably in several fields, from cybersecurity to digital healthcare, to solutions that are related to remote working. As such, VCs and other investors can look to these market opportunities (estimated to be worth $12 T) as their key to play a part in achieving the UN Sustainable Development Goals.
Source: peterfisk.com
Essentially, if a VC invests in companies that are aligned with achieving the SDGs, they will not only increase their profits, but they will also contribute to the Earth’s sustainability – issues such as climate change, poverty, and unequal access to healthcare are all worthy of more investor attention.
Sustainable investing also provides a public image boost. Zooming into the US, the merits of value-based investments have already been recognized; in a recent survey, 41% of respondents plan to increase the amount they spend on “impact investments” in the next year, while another 40% are considering trying it in 2023.
Playing the Long Game – 5 Key Reasons Why Sustainable Investing is Here to Stay
The numbers don’t lie: sustainable investing is a booming business and investors willing to look at the long-term benefits will surely pull ahead of their competition. Here are the five reasons why getting into the sustainable investing space is a good idea.
1. The demand is driven by investors
As mentioned above, there has been a dramatic shift to sustainable investing because it is being pushed from the bottom up. From angel investors to big corporations, large portions of portfolios are now being taken up by sustainable investments.
2. Technology has become the catalyst
Data has had a massive role and will continue to play a massive role in furthering the upward trajectory of ESG/Sustainability/Impact Investing. The simple fact is that data technology, coupled with the AI capabilities now widely available, has made it easier for investors to assess a company’s operations from an ESG perspective, and subsequently (in line with their own sustainability strategies), make their investment decisions. As a result, entities – from startups to Fortune 500 companies – are all pushing their own sustainability agendas to retain and attract attention from their stakeholders and potential investors.
3. The time to act is now
While ESG issues have arguably been around for several decades, it is only in the past five years or so that the world has collectively begun to realize how important it is to promote sustainable investing as a way of achieving long-term growth. In this aspect, governments will also have a key role to play in encouraging their local entities to lead the charge; this is done through the creation of supportive policies and regulations, while also persuading investors that sustainable investing will continue to be viable for many years to come.
4. Research is important
Frameworks for sustainable investing are being developed and refined everywhere to support the accelerated pace of this space; by having a comprehensive view of the challenges and risks and ESG-related rewards of each investment, investors will be able to see the merits of having a sustainability portfolio.
5. Low carbon emissions and the energy transition
While a company’s ESG credentials are important, investors are also looking at how each sector, country, and region they are investing in is pushing the change for a low carbon future. Companies with sustainability agendas must be able to ensure they are able to handle the transition to using clean energy with the resources they have available, thus positioning them as resilient investments. Additionally, countries with an identifiable low carbon agenda will remain competitive in the market.
Sources
1. https://www.sustainablenetwork.com/resources/rise-of-sustainable-venture-capital-investing
4. https://www.fidelitycharitable.org/insights/insights-into-impact-investing-for-2022-and-beyond.html
