Chris Holmes, Investment Adviser, John Laing Environmental Assets Group (JLEN)
More than 70% of investors have never been offered ESG-based investment opportunities. This provides a significant opportunity for wealth and asset managers to offer values-based investments, attracting new assets and retaining beneficiary clients.
According to the Global Sustainable Investment Alliance, more than $30 trillion is already invested in socially responsible investments, up 34% since 2016. European investors are the biggest supporters at $14 trillion.
Unless stated in an investment mandate, ESG investing does not exclude certain sectors, countries and companies, nor does it sacrifice portfolio returns
To add some context, Environmental, Social and Governance (ESG) investing involves the explicit and systematic inclusion of ESG factors in investment analysis and investment decisions. Sustainable investing and impact investing are branches of ESG investing, usually with the aim of achieving a set of specific deliverables beyond financial return (for example, carbon reduction).
Unless stated in an investment mandate, ESG investing does not exclude certain sectors, countries and companies, nor does it sacrifice portfolio returns.
Drivers behind the demand
- Legislation: Government policy and legislation related to ESG investment is on the rise. The UK is looking at how to eliminate or restrict structural incentives that promote the pursuit of short term returns to the detriment of longerterm considerations.
- It also looks likely that European markets will be subject to a form of sustainable finance legislation in the future and China has already moved on this issue.
- Risk management and portfolio resilience: The World Economic Forum lists failure of climate-change adaptation, man-made environmental disasters, water crises and biodiversity loss among its top 10 risks , many of them higher than the risk of cyber-attacks.
- It makes financial sense, therefore, to develop a portfolio that is resilient to these risks wherever possible.
- Investor demand: Demand for ESG investing is influenced by millennials and Gen-Z investors, who invest to align with their personal values. And as they inherit baby boomer wealth, we can expect many investors to seek values-matching ESG, or ethical, investment options.
Scale of the opportunity is life-changing
Take the low carbon energy market as an example. Funds such as JLEN have embraced the UK government’s support of a low carbon economy. Combined with the declining cost of low carbon technologies, we have built a 275MW portfolio of subsidy-backed wind, solar, anaerobic digestion, wastewater treatment and waste management assets.
And we’re not alone. This is a fast-growing market with long-term prospects for investors.
Bloomberg New Energy Finance research predicts by 2050 the size of the global low carbon investment market will be $10 trillion, providing 71% of global electricity from zerocarbon sources.
And thanks to subsidies catalysing a supply chain industry, the cost of low carbon energy has dropped drastically in the last 10 years and is now competitive with conventional generation.
Source: Lazard’s Levelized Cost of Energy Analysis v 12.0
Challenges such as the circular economy, decarbonisation, water scarcity, board diversity, gender pay gap, modern slavery are all able to be addressed in investments using ESG investing principles. As global AUM based on ESG criteria continues to grow rapidly over the next decade, understanding that direction of travel will not only help manage risk in portfolios but will also deliver greater value to investors over time.
ii. Global Sustainable Investment Alliance Trends Report 2018
iii. United Nations Principles for Responsible Investment
vii. World Economic Forum Global Risks Perception Survey