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The Role Of Sustainable Investing as a Driver for Change

By Jessica Robinson
ASrIA

 Creating lasting societal change – change that dramatically improves the lives of the majority – requires rapid and transformative action in the way in which we use economic capital.  Capital can and should be put to efficient and effective use in reshaping the way we do business, the way we grow, the way we live our lives.  Sustainable investing must be at the heart of this.

 What is sustainable investing?

 With roots in ethical investing approaches, sustainable investing requires economic and investment decisions to be made on a set of values that reflect long-term priorities and sustainability concerns. Historically, sustainable investors have been a force for positive change through developing inclusive mandates that, whilst seeking to invest for a financial return, include explicit consideration of non-financial returns. Where sustainable investing has gained the most traction – largely in North America and Europe – sustainable investors have helped improve the environmental, social and governance practices of many companies. 

 Why should sustainable investing be a priority in 2014?

 Climate change, resource constraints, environmental degradation and social and economic inequality are just some of the challenges that we now face.  Simple acknowledgement of these challenges demonstrates that prevalent economic growth models are not working. We stand at a point in time when investors can be a force for positive change.  Investing approaches are integral to economic growth, with investors having immense influence as the decision-makers over how much of our capital is employed.

 Creating a transformative shift …

 However in order to achieve this, investors must think beyond financial return and to the broader impacts that economic activity can have.  Today’s economic circumstances necessitate such a shift. The Global Financial Crisis of 2008 bore witness to the challenge at hand – imploding asset bubbles, accounting scandals and serious governance lapses have drawn attention to the fact that financial market actors are often driven by short-term goals and fail to maintain a long-term perspective that looks beyond the next financial year. We need investors to think in terms of 10, 20, 30 years and beyond – and this shift in mindset needs to be mainstream.

 What happens next – leveraging the power of sustainable investing?

 One of the central challenges to be addressed is the need for existing capital market structures to be reformed, to facilitate better capital allocation and better understanding of risks.  Through financial market reform – on a national, regional and international level – the concepts of prudent financial risk management and long-termism can be defined in the language of investment professionals and embedded in the governing regulatory frameworks. 

With greater policy certainty and regulatory structure, the investment industry can be incentivized to develop the appropriate tools and techniques required to quantify and manage the risks we face: risks associated with climate change, social dynamics, sustainability issues, risks that have often been ignored and deemed too difficult to define. 

Our markets require a framework through which to adequately price these risks – and this must begin with pricing externalities and valuing natural capital.  Basic economics tells us that our markets have been operating inefficiently, with our insatiable demand for ‘free’ public goods, without acknowledgement of the real costs that this incurs to society.  Governments should send the right policy signals by putting a price on carbon and removing fossil fuel subsidies.

 Emerging trends – positive developments are occurring …

 In 2012, the Global Sustainable Investment Review (published by the Global Sustainable Investment Alliance, of which ASrIA is a founding member) found that globally at least US$ 13.6 trillion worth of professionally managed assets incorporate environmental, social and governance concerns into their investment selection and management.  

This represents 21.8 percent of the total assets managed professionally, indicating that sustainable investing is becoming a viable force for change.  Geographically, this is highly varied – with greatest traction in the North American and European markets – but with the greatest opportunity in emerging markets, and Asia in particular. 

Positive trends are emerging.  For example, increasing pressure from all corners on disclosure, reporting and transparency is facilitating financial market reform.  Better information will allow investors to make smarter investment decisions.  Debate on key issues such as fossil fuel investment is becoming increasingly heated and finally investors and policy-makers are beginning to take note. 

 

Sustainable investing – steps to support the vision for the future?

 There is a long way to go – but, through leveraging sustainable investing as a driver for positive change, much can be achieved.  In order to create this vision for the future, leadership is required.  So what steps can be taken to support this?

 

  • Policy-makers should focus on aligning the financial system with the needs of the ‘real economy’ – in particular, to ensure that investors and other market actors look ahead to the next 20 to 50 years;
  • Greater emphasis should be given to educating investors – whether institutional or retail – on the types of investment opportunities that exist;
  • Focus should be given to scaling up investor holding of long-term assets, particularly infrastructure investments, by lowering cost of capital and facilitating longer term debt;
  • Investors should be encouraged to facilitate corporate change through mechanisms such as shareholder engagement, asset allocation and credit policy; and
  • Policy reform should reflect changing societal values, facilitating long-term objective setting with policy practices and financial instruments that underpin this.

 Sustainable investing requires a re-setting of market mechanisms to recalibrate the decision-making process governing the use of economic capital.  Sustainable investing is about sound risk management – but more than simply improving risk-adjusted performance, sustainable investing can provide a response to the unsustainable economic and industry trends of recent years, to result in a better tomorrow.

 

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