The coming year could be one when the investment community starts to fully appreciate the need to prioritise acting in a sustainable manner, those already active in the space believe.
While most are aware of the profound challenges facing the environment, sustainable investing continues to edge its way into the mainstream as more and more investors start to demand that their portfolios work for the good of the planet as well as their own finances.
Jessica Ground, global head of stewardship at Schroders, said: “Usually sustainability experts avoid having to pen market outlook pieces; it’s all about the long term after all. But our thesis at Schroders is that environmental and social change is accelerating, generating an ever-stronger headwind for companies to navigate.
“2018 has provided ample evidence of this, with populism continuing to rise alongside global temperatures. Increasingly, there is nowhere to hide for companies who don’t operate in a sustainable way: technology companies, which in the past seemed almost untouchable, have seen more taxation, regulation and a number of uncomfortable moments in front of Congress.
“Against this backdrop, environmental, social and governance analysis and forecasting has never been more important for investors.”
For example, climate change is often seen as the ultimate long-term issue with much talk about the action that needs to be taken by 2030 – which is seems like a lifetime away for most investors.
However, Ground pointed out that some aspects of climate change can be seen in the here and now, such as the rise in global temperatures and the impact that associated extreme weather events can have.
This could be “especially pertinent” in 2019 as experts believe that an El Nino weather pattern will develop during the year, which will cause higher temperatures and lift the risk of severe weather around the world.
“Investors often neglect to thoroughly understand just how vulnerable a company’s physical assets and infrastructure are to severe disruption and damage as a direct result of drastic weather patterns,” Ground said.
Because of this, the stewardship team at Schroders developed a physical risk framework to apply to over 10,000 companies globally. It calculates the amount of insurance businesses would have to pay to protect their physical assets against weather-related hazards.
“We identified oil & gas, utilities and basic resources as the sectors most exposed to the physical impact of climate change,” she said.
“The potential cost of insuring their physical assets equates to more than 3 per cent of their market values. The sectors least at risk are technology, personal & household goods and healthcare.”
Andrew Parry, head of sustainable investing at Hermes Investment Management, agreed that extreme global weather events continue to exact a rising economic cost and play a role in the social crises affecting some of the poorest regions of the world.
He pointed out that the Intergovernmental Panel on Climate Change has issued its starkest warning yet that the window of opportunity to global warming to 1.5 degrees is closing fast.
“‘Business as usual’ is no longer an option. Is 2019 going to be the year that investors and companies fill the void in policy making increasingly left by governments?” Parry asked.
“While markets fret about the consequences of the end of quantitative easing, the damage wrought to demand and profits by the global financial crisis will be nothing compared to the economic and social fallout of degrees of warming. The rise of sustainable investing gives us hope that the investment community is recognising the threat.”
However, in order for genuine success, Parry said the investment community needs to go beyond thinking it is enough to simply label products as being ‘sustainable’ or ‘responsible’. Instead, investment managers need to deliver real change in corporate behaviour through active and purposeful stewardship of client assets.
“Better and more standardised reporting of the material risks and opportunities in company activities will be a starting point,” he concluded.
“This can drive real changes in supply and demand for more sustainable products and services. Only by changing the balance of positive and negative impacts in the entire value chain can we deliver a more resilient and prosperous world for all.”
Charlie Thomas, manager of the Jupiter Ecology fund, highlighted that some specific sustainable investment themes could become more important in 2019 and singled out the ‘circular economy’ as one.
He argued that legitimate concerns around waste, and plastics in particular, will continue to draw attention, driven by a “powerful confluence” of health, environmental and public cost concerns.
The manager added that the reaction to this in 2018 has been “nothing short of radical”: Asian countries have followed China’s lead and are closing their doors to waste coming from overseas. The UK, for example, exports around two-thirds of plastic waste overseas, but this figure will potentially come down as the government starts to deal with this issue.
“Indeed, a new waste strategy that has been under development for over a year looks set now to tackle the problem at its cause – attempting to address how materials are designed, produced, and used, as well as recycled,” Thomas said.
“With similar initiatives across developed and emerging countries alike, the private sector is pre-empting an inevitable upheaval, creating opportunities within the theme from sustainable packaging through to recycling technologies.”