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The drive to protect the planet and to make sure human development is done in an environmentally sustainable way is already becoming one of the key issues of the 2020s.
In the latest World Economic Forum’s (WEF) Global Risks report, all five of the top long-term risks were related to the environment:
- extreme weather events;
- human-made environmental damage and disasters;
- failure to mitigate climate change;
- biodiversity loss and ecosystem collapse; and
- major natural disasters.
The environment also featured high on the list of priorities at the recent WEF gathering in Davos.
It’s therefore no surprise that environmental sustainability has become a fundamental investment theme as well.
According to Morningstar, net inflows into sustainable investment funds in the US almost quadrupled in 2019, to US$20.6bn. The trend is likely to continue in the coming years, as investors demand that those who manage their money ask tough questions of the companies they invest in, concerning their impact on the environment.
ESG funds are outperforming benchmarks
This pressure is coming from all sides: from young investors who want their investments to make a positive impact on the world, to older investors who want to leave a legacy, and to pension fund trustees who are more conscious of the demands of their fund members.
The evidence moreover shows that this focus on environmental, social and governance (ESG) factors has been good for returns.
A Barron’s survey showed that 189 actively managed funds in the US that ranked “high” or “above average” on ESG criteria returned an average 30% in 2019 – just shy of the S&P 500 total return for the year – while 41% of the funds beat the S&P 500.
Given these returns, there has understandably been a call for the investment industry to include environmental sustainability criteria into their investment mandates and products.
“Investors want to see greater sophistication and flexibility from their investments to meet their specific return goals. They also want those investments to have an impact on creating a better world which aligns with the United Nations’ Sustainable Development Goals,” says Sonia Lynch of structured products at Investec.
Lynch explains that there are now a number of credible global indices designed around ESG criteria, which can be use as their benchmarks for mandates or product development.
South Africa’s first green autocall
In line with Investec’s commitment to support the climate transition and contribute to the United Nations Sustainable Development Goals, the firm has announced the launch of South Africa’s first structured product that addresses environmental sustainability.
The Investec Environmental World Index Autocall contains the unique features of an Autocall structure, with returns linked to the performance of the Euronext CDP Environment World Index.
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Profit and purpose
Chris Holdsworth, Chief Investment Strategist, Investec Wealth & Investment, says investment houses are increasingly including ESG into their investment process.
He concurs with the findings of the Barrons survey, cited above.
“You often find that sustainable investments are companies that are better managed and will, over time, deliver better financial returns than those companies that are not sustainable,” says Holdsworth
Holdsworth notes that this is particularly true in the case of emerging markets. “If you look at performance of stocks that screen well from an ESG perspective, in emerging markets they tend to outperform stocks that screen poorly,” Holdsworth points out.
“It's not as true in developed markets – perhaps you could argue that in developed markets the regulatory framework acts as a screen by itself and so perhaps ESG screening doesn't add as much. However, in emerging markets it is certainly the case that if you were to have structured your portfolio along ESG considerations for the past few years, you would have outperformed materially.”
About the author
Patrick writes and edits content for Investec Wealth & Investment, and Corporate and Institutional Banking, including editing the Daily View, Monthly View and One Magazine - an online publication for Investec's Wealth clients. Patrick was a financial journalist for many years for publications such as Financial Mail, Finweek and Business Report. He holds a BA and a PDM (Bus.Admin.) both from Wits University.