Financial returns in the sustainable space was a key theme at the world's leading responsible investment conference. Investec Wealth & Investment Chief Investment Strategist Chris Holdsworth, and investment analysts Boipelo Rabothata and Kyle Lasarow share their insights from the event.
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Over 1,000 institutional investors, representing firms that collectively manage an estimated $121 trillion globally, gathered in Japan last week for the annual meeting of the United Nation’s Principles for Responsible Investment (PRI).
This year's event took place at a critical point in the responsible investing journey against a backdrop of US Republican politicians coordinating pushback against the use of Environmental, Social, and Governance (ESG) factors in investment decision-making.
Recent studies have led critics to question the efficacy and long-term viability of sustainable investments, suggesting that they may not match the returns of standard index funds. The counter argument at the PRI event was that underperformance was brought on by a volatile global economic environment and is a temporary setback in a longer journey toward sustainability.
As a signatory to the PRI, a delegation from Investec Wealth & Investment attended the event in Tokyo, including Chief Investment Strategist Chris Holdsworth, and investment analysts Boipelo Rabothata and Kyle Lasarow.
I spoke to the team on their return to get their insights from the conference for the latest episode of Investec’s No Ordinary Wednesday podcast.
Underperformance of ESG investments
Holdsworth believes that there are four primary sources for the backlash against ESG.
1. “ESG is increasingly viewed as another avenue for government intervention in financial markets.” He says the answer here lies in the formation of associations like the PRI – “it’s a form of self-regulation to avoid formal government regulation in what you can and cannot invest.”
2. “There are some scenarios under which you land up with less competition across asset managers, and that could be problematic.”
3. The third is what's known as greenwashing, where companies exaggerate or misrepresent their environmental efforts. “With the private sector regulating itself, it will keep greenwashing in check.”
4. “The fourth concern has been the recent period of poor performance of new age ESG type companies relative to the broader basket.”
“With regards to low performance, we have to recognise that there's a cycle and ESG type investing is going to sit within the broader framework of investing,” says Holdsworth.
Sustainable investors are reticent to invest in old school-type industries, favouring a growth focus on new age companies in their portfolios. And when interest rates go up, growth tends to do poorly.
However, ESG is not going away. According to Pricewaterhouse Coopers, ESG-focused institutional investment will soar by 84% from 2021 to US$33.9 trillion in 2026, making up 21.5% of assets under management
“Increasingly it's going to account for a larger and larger portion of total AUM, but it will not outperform under all cycles. There will be periods where you land up with low quality or, some ESG type investments will underperform.
“I don't think that that is a long-term threat, it's not a structural threat, that, that one is more cyclical.”
What does it is mean to be a PRI signatory?
Influenced by rising concerns over climate change and biodiversity loss, asset managers are increasingly analysing corporate performance on ESG-resulted issues and evaluating them on their broader societal contributions and environmental impacts, instead of merely focusing on short-term financial gains.
Defending their stance on stakeholder capitalism, Larry Fink, CEO of the world’s biggest asset manager BlackRock, wrote an open letter in January in which he said: “In today’s globally interconnected world, a company must create value for and be valued by its full range of stakeholders in order to deliver long-term value for its shareholders.”
It's a business philosophy embraced by Investec who says the essence of being a PRI signatory represents a commitment to adopt and integrate ESG principles into investment decisions and to transparently report on these actions, ensuring accountability and genuine progress towards sustainability.
But the viability of sustainable investing rests on delivering results for all stakeholders, including investors, says Lasarow.
As there is a purpose-driven argument behind investing in a sustainable manner, we do need to realise that in order for this to have longevity, we do need to provide sufficient returns to our investors’ capital. It's not a charity. It's a risk mitigator or a way to direct investment in the right places in the market.
Government transition bonds
The conference also highlighted significant commitments to green initiatives, with Japan's Prime Minister, Fumio Kishida, pledging support for green startups and sustainable projects.
Kishida said that the Government of Japan will issue new government transition bonds, called "Climate Transition Bonds" to achieve net-zero by 2050.
These bonds will be the world's first government-issued transition bonds aligned with global standards and will enable 20 trillion-yen worth of advance investments towards the accelerated uptake of renewable energy, new energy sources such as hydrogen, and industrial facilities and equipment in industries such as steel, chemicals, and automobiles.
Seeing the public sector in Japan taking action on sustainability issues by unlocking finances to tackle climate and nature related issues was one of the things that really stood out for me.
Collaboration is key
Scientists speaking at the event pointed to a large degree of uncertainty around climate change forecasts.
“Their base case is that the Paris Agreement won't be met. That is that global temperatures will be one and a half degrees or more above the reference point, and that we won't get to net zero by 2050. But there is hope and a base case that will get there within a decade or a decade or so after that,” says Holdsworth.
This will only happen however through close collaboration between the public and private sectors to effectively tackle climate-related challenges, says Rabothata.
She outlined emerging regulatory standards in sustainable finance, such as the SPRING initiative by PRI, which focuses on nature-related disclosures. Such developments, she says, underscore the need for standardised and transparent ESG reporting.
However, sustainable investing faces hurdles. Holdsworth says issues like greenwashing, where companies exaggerate or misrepresent their environmental efforts, as well as challenges related to regulatory and governmental interventions in the sector still pose a problem.
Lasarow pointed out opportunities in the space: “There are a number of ways to invest in the sustainable theme, and that could be things like looking at startups in the private equity space that are investing or inventing new carbon capture technologies or better ways of doing things.
He also mentioned the electric vehicles industry that is gaining market share and opportunities to invest in companies that benefit from the increasing regulation.
In his opinion, one of the biggest themes that's going to play out over the next number of years is the billions of dollars being dedicated into energy generation and transmission in a more sustainable way.
“So, infrastructure that takes years to build, but also provides a steady revenue stream once built and has really high barriers of entry. That looks really, really compelling as an investor, as a place to be. And that's not even looking at the secondary beneficiaries in that case.”
Investors can join the collective action
In his keynote at the PRI event, Prime Minister Kishida said: “Addressing social challenges through investment would encourage companies to drive change, enhance sustainability of our economies and societies, as well as harness growth potential of our world. This would, in turn, provide long-term financial opportunities to both investors and the beneficiaries who entrust their funds to the investors.”
To the investment community the call would seem clear – to acknowledge the ethos of sustainable investing more holistically; to collaborate more efficiently; and pledge greater commitment to a sustainable future.
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