14 May 2019

Sustainable Investing Updated

The Potential of Sustainable Investing
The sustainable investment market has grown exponentially in recent years, and with millennials set to become prominent wealth holders, the upward curve will likely continue in the future as well. Globally, assets with sustainable investing criteria reached the $30 trillion mark in 2018, a 34% increase in two years, with Europe and the US leading the way with $14 trillion and $12 trillion in investments (Bloomberg).Millennials are expected to receive over $30 trillion in inheritable wealth (EY).

Growth in Sustainable Investing

With the majority of millenniums and other investors interested in socially responsible investments, asset management firms are gravitating towards a new mindset in considering sustainability and general social benefit.
Investor’s appetites are growing continuously. A 2019 survey report by Morgan Stanley and Bloomberg shows that 75% of firms offer sustainable investing and 39% will allocate resources to sustainable investing in the next 1-2 years. Out of the 75% asset managers, 31% exclusively deal in sustainable investments and 44% incorporate sustainable investment widely.

Performance of Sustainable Assets

Sustainable investing is the use of environmental, social, and governance (ESG) strategies for investing. It’s a system in which values of investors are important along with financial gain. Besides being socially responsible, sustainable investments also perform well as assets. According to Morgan Stanley, a 2015 study of open-end mutual funds and separately-managed accounts over seven years showed that sustainable investments often exceeded traditional investments in performance. The belief in profitability of sustainable investments is strong in 2019 as well, with 62% of asset managers saying that it's possible to maximize financial returns with sustainable investments (Morgan Stanley and Bloomberg 2019 survey).

To find suitable options, investors evaluate companies based on ESG risk factors. This approach separates the best performing companies from the rest. Besides the impact of millennials on the investment market, the growth in sustainable assets is also due to the economic trends prevalent globally. Demand for basic necessities such as food water, health care, and energy are important drivers in the growth of sustainable investments.

Sustainable Investment Products

The products offered by specialist investors and adopters range from mutual funds and exchange traded funds to separately managed accounts and private equity. There isn’t a specific type of product leading the pack yet, but specialist firms are more inclined to use ESG integration and restriction screening compared to mainstream adopters (Morgan Stanley and Bloomberg 2019 study).

Trends and Challenges with Sustainable Development

In 2015, The United Nations purposed 17 sustainable development goals (SDGs). These goals include clean water and sanitation, affordable and clean energy, good health and wellbeing, and decent work and economic growth, among others. This initiative should encourage companies to align with these development goals. Another recent trend is the increase in carbon emissions.

Last year, carbon emissions increased instead of decreasing for the first time since 2014. Companies will need to engage with carbon emitters and develop solutions to reverse this trend.

While the optimism for sustainable investing is very much there, investment managers agree that there are is no standard definition for sustainable investing and a lack of credible data and research to make sustainable investing decisions (Morgan Stanley and Bloomberg, 2019 study).

At Bear Stearns we are wholly committed to leading this evolution in understanding about how to best develop profit and growth while making a difference.