Looking to the future – the importance of sustainable investing

Sustainable investing, which combines environmental, social and governance-related (ESG) insights with traditional portfolio construction techniques, is continuing to increase in popularity.

Uncertainty Experts Webinar

Increasingly these days, clients are interested both in ensuring they receive healthy returns on their investments and knowing that their money is channelled into areas that are having a positive effect on the world. These concerns have been around for a long time now. Indeed, Aviva’s investment-management arm, Aviva Investors, has a distinguished heritage in this area, dating back to the early 1970s.[1]

However, before looking at the future of sustainable investing, it’s important to acknowledge that some clients may be confused by some of the language associated with this area.

Aviva uses the concept of Sustainable and Responsible Investing (SRI) as an umbrella term for a wide range of investment strategies that focus on ethical, social and environmental issues. The aim is to invest in a manner that helps create a more sustainable world, in terms of both the environment and societies.

Why environmental, social and governance concerns matter

Sustainable investing recognises the interconnected nature of the world and how investors can have a positive impact on key areas such as the environment and societies. Sustainable investing seeks to address issues such as climate change and problems that threaten the equitable development and stability of societies.

Consequently, sustainable investing incorporates what are known as environmental, social and governance (ESG) considerations when building investment portfolios. Under the Environmental pillar, analysts will look at factors such as the emissions – including greenhouse gases and air, water and ground pollution – that a company produces.

How a company deals with its employees, in terms of issues such as pay, health and safety, and discrimination, is one of the considerations that fall under the Social pillar.

Governance relates to how a company behaves in terms of shareholders rights, board diversity, executive compensation, anti-competitive practices and corruption.

Uncertainty Experts Webinar

A sustainable focus alongside a financial return on investment

The ESG approach seeks to include assets that score highly on those all-important environment, social and governance factors. This means your clients can be assured that their money is being invested in a way that should have positive implications for the planet.

At Aviva, we also believe that evaluating ESG criteria is a way of enhancing traditional financial analysis, not replacing it. The aim isn’t solely to make sure that investment is ethical; the main objective of ESG, as with any investment, is financial performance.

The logic here is that companies that care about the environment, society and good governance should perform better in the long term than those that don’t prioritise those things – making responsible organisations a better investment all round.1

In the past, the focus was largely on excluding companies that behaved badly. Now it also involves investing in companies that have the potential to reduce their environmental impact, as well as those that are already behaving well in environmental terms.

So, for example, if you can identify a company that is polluting and can encourage it to reduce its environmental impact by investing in new plant practices that significantly reduce carbon emissions, the impact on the planet may be better than investing in a company that already emits low levels of carbon.

The aim is to encourage as well as reward, in other words. That’s significantly different from the old approach, which simply sought to exclude or punish companies that were behaving irresponsibly.

Making an impact

Another relatively new concept is that of impact investing, which is defined by the United Nations as “the deployment of funds into investments that generate a measurable and beneficial social or environmental impact alongside a financial return on investment”.[2]

Impact investing is a very useful tool for investors who are concerned about a particular issue. It emphasises the measurement and reporting of the social and environmental outcomes of investments. By contrast, sustainable investing may include the integration of ESG considerations in the investment process but may not always require direct impact measurement.[3]

Impact investing is growing in popularity and is helping address some of the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy, conservation, microfinance, and affordable and accessible basic services, including housing, healthcare and education, according to the Global Impact Investing Network.[4]

Since the term was coined in 2007, the impact-investing field has grown rapidly. Today, around US$3 trillion of assets are under management globally, and the size of the impact-investing market is expected to increase to nearly US$8 trillion over the next 10 years as the concept grows in popularity.[5]

Growing interest in biodiversity

The critical importance of biodiversity to the planet’s health is increasingly recognised by academics, investment managers and the wider public. That’s because, as the UN points out, “from increasing the threat of disease to disrupting our global food chain, biodiversity loss across the globe is threatening the very foundation of our future and the well-being of everyone, everywhere”.

Although they still represent a fraction of the overall market, biodiversity and nature-themed funds are mushrooming.[6] Asset managers are establishing specialised funds that target positive biodiversity outcomes. This involves screening out companies with known negative impacts on nature in their operations or supply chains, or those with no stated plan to improve their impacts. Biodiversity funds can also target specific objectives, such as investing in companies developing solutions, such as technology for precision agriculture that reduces the use of harmful pesticides.

Advances in technology

Asset managers are increasingly harnessing artificial intelligence (AI) and other new technologies to enhance the effectiveness of sustainable investing. Simply measuring the effect of investments on the environment and society has previously been a highly labour-intensive process. However, the ability of AI to crunch vast amounts of data at great speed means asset managers can now access real-time data and insights that allow them to assess the effectiveness of their investments immediately.

In addition, AI-driven algorithms can analyse vast datasets to compare and predict the potential social and environmental impact of a large variety of investment opportunities. That allows investors to more precisely target the most effective sustainable solutions.

How your clients can invest sustainably

Investing sustainably can be difficult for individual investors. It’s extremely challenging to assess whether a company is behaving in a sustainable manner, which is why asset managers employ armies of analysts who pore over data and visit companies to inspect their operations in person. It’s also challenging to construct a diversified and balanced portfolio of sustainable assets.

However, it’s relatively easy for clients to invest sustainably though investment platforms. Some allow clients to invest in funds that directly match their particular investment preferences, such as addressing climate change or human rights, or a combination of those concerns. Advisers can even drill down to very specific issues, such as women in leadership, deforestation, access to water security, corporate governance and air pollution. They can then direct clients to specific funds that address those issues.

In conclusion, while sustainable investing might once have seemed a relatively small part of the investment industry, it’s now very much in the mainstream. Moreover, there is plenty of evidence to show that it will continue to grow in importance as more and more investors focus on ensuring their savings make a positive contribution as well as generating a sound return.

Discover more about Aviva's apporach to ESG Investmenting on our ESG Resource Hub

Uncertainty Experts Webinar

[1] Aviva -  Embedding sustainability responsible investment

[2] United Nations Development Programme - Impact Investing | United Nations Development Programme (undp.org)  

[3] IMD - Impact investing everything you need to know

[4] Global Income Investing Network -  Impact investing everything you need-to-know

[5] The Braint Insights - Impact Investing Market Size by Sector (Education, Agriculture, Healthcare, Energy, Housing, and Others), Investor (Individual Investors, Institutional Investors, and Others), Regions, Global Industry Analysis, Share, Growth, Trends, and Forecast 2024 to 2033

[6] Reuters -  Comment: Why biodiversity is about to go mainstream in ESG investing