To put it frankly, channeling your capital based on environmental, social and corporate governance (ESG) factors, has an impact.
“It creates pressure on companies to disclose more about what they’re doing and to potentially also change their practices,” says Ioannis Ioannou, a professor of sustainable investment at London Business School, and a visiting professor at Miami Herbert University.
ESG investment is on the rise globally, with assets under management having surged from $30.7 trillion in 2018 to $35.3 trillion in 2020, according to the Global Sustainable Investment Alliance (GSIA).
But for investors looking to greenify their portfolio, the choices can be enormous – and often puzzling with continuous confusion around the basics such as what is sustainable investment, how to make sustainability profitable and where the field is headed.
Neste, a global leader in renewable and circular solutions, has for years offered investors an opportunity to channel their capital into solutions that mitigate climate change.
The watershed moments
The turning point for sustainable investment came in 2006, says Tiina Landau, Sustainability Manager at Neste, and co-author of the book Sustainable Investing: Beating the Market with ESG published by Palgrave Macmillan in 2021. Before joining Neste, Landau worked for one of the largest mutual pension insurance companies in Finland.
In 2006, the UN launched its Principles for Responsible Investment (PRI), a voluntary initiative to encourage investors to consider ESG issues when making investments. “That was the first time a bunch of core investors sat in a room and thought: ‘What is responsible investing?’,” says Landau.
The PRI helped crystallize a definition of what sustainable investment was, and what those who wanted to follow those principles should do to ensure their money is invested wisely.
It took, however, another ten years or so after the release of the PRI for these investment criteria to spread more widely.
The Paris Climate Agreement of 2015 was the moment that sustainability became a priority for investors big and small. “Portfolio managers were starting to look at it,” says Landau.
Landau witnessed the change in attitude first-hand. She was taught in business school that mitigating risk meant spreading your portfolio across a group of companies in different industries.
Diversification is one way to head it off. But as Landau remarks, “You cannot diversify away climate change. Nobody can say I don’t have this climate change issue in my portfolio.”
The fluid definition of sustainable investment
As stakeholders have increasingly bought into the importance of sustainable investing, a range of different investment products and opportunities have appeared in the market.
Not all of them are as sustainable as others, however.
“The issue is you have a lot of choices, and there is a lack of common standards and common language,” Ioannou says.
“In my view, there is a high degree of tolerance about what is considered a green investment.” Some investment funds slap a ‘green’ label on their products without much dedication to the cause.
That’s understandable, though, Ioannou explains. “We need to understand that if we take a step back and look at the longer time horizon, we understand these are very dynamic issues.”
Natural gas, for instance, was seen as a necessary bridging fuel between fossil fuel reliance and the new world of renewables. Successive redrawings of climate targets have made it slip more towards being categorized as a fossil fuel alongside oil.
Sustainability data keeps evolving
In recent years, new analysis has been made public to help guide investors. Global finance giant MSCI issues ESG ratings for over 8,500 companies globally. It also provides information on the share of revenue that is in clean investment in a fund.
“Nowadays, it’s easier for people to check whether a fund has the kind of investments they say they have,” says Landau.
And the standardization is spreading. Incoming legislation from the European Union (EU) will require investment funds to justify their labelling of a product as ‘sustainable’ with direct reference to EU standards.
Landau believes that artificial intelligence (AI) could help unlock more of the potential in sustainable investing by using big data tools to identify sustainable investment opportunities.
Investors are also starting to dig deeper into what the impact of companies on the environment is.
“We can say some companies have 10% of revenue from green solutions, and another can have 20% – but whose impact is bigger?” she asks. Leading investors want to take the investigation beyond a simple look at which is the greater number and look at more meaningful changes to the environment.
The pathway to profit
With more rigour comes more responsibility – and more investor confidence, meaning the old adage that you could invest responsibly or you could make money, but you couldn’t do both, is no longer true.
“There is research saying that if you look at sustainability ratings and ESG risks, if you invest in the most sustainable in each sector, you can make money,” says Landau.
Of course, not every fund is guaranteed a profit – whether they’re sustainable or not – and returns can vary.
But as more light is thrown on the importance of sustainable business and sustainability at large, those companies that invest in clean, green businesses are seeing better returns because of their ability to adapt to the world in which we live.
However, there are untapped areas in sustainable investing. “Forward-thinking investors are focusing on water and biodiversity as well as the climate,” Landau says.
“It’s going to be the norm”
Neste is eyeing to become an even more lucrative investment option for sustainability-minded investors by steering its focus toward innovation and research and development.
“We are looking into the new raw materials of the future,” Landau says. “In order to provide solutions, you have to go where the negative impacts are. You have to do your homework and try to mitigate what's not so ideal.”
That’s vital because the future of investment won’t look much like the past – and it’s crucial to be in the vanguard. “Thirty years down the line, it's hard for me to imagine an investment that does not take into account some combination of ESG and maybe what we now call mainstream investment,” Ioannou says.
“It’s going to become the norm. We’re going to be talking about investment but consider the financial as well as non-financial impact.”