What we do today will have an impact on the world we live in tomorrow. This is why M&G takes responsible investment seriously. It’s more than ESG, it’s about investing in a way that benefits society and investors alike.
Today, we face defining choices that will shape the direction of our society and planet. We all have a role to play, from what we buy as consumers to the way we travel.
How we put our savings and investments to work also helps shape the world. By investing responsibly, we can have a positive influence while targeting more sustainable financial returns for our futures.
The value of investments will fluctuate, which will cause fund prices to fall as well as rise and you may not get back the original amount you invested
Putting your investments to work for good
When it comes to investing money for the long term, your top priority is probably to grow your capital. However, you can accomplish more than this.
You can aim to not only invest profitably over the years, but to do so in a way that minimises costs to the planet and society. Responsible approaches to investing recognise that we could succeed in both these goals.
Indeed, efforts to address the world’s most pressing sustainability issues, like delivering universal access to quality education and clean water, present long-term opportunities for investors. Investing responsibly could therefore be a win-win, for you and wider society.
We have identified five trends to consider if you are looking to target sustainable long-term returns with your investments.
1. Integrating three little letters – E, S and G
When deciding where to invest responsibly, you can start by avoiding companies that don’t meet certain basic standards on, say, human rights, labour rights, bribery or the environment. You might also want to rule out whole industries on the basis that they may be harmful to society.
However, investing this way has limitations. The real world is not black and white, after all.
Instead, more and more people today are seeking out sustainable, responsibly-managed businesses to invest in. These may be working to reduce their environmental footprint or support the communities in which they operate, as well as following best practice for safety and management.
There is growing recognition that if a company is run well with high standards of corporate governance, it is more likely to be successful. A company is unlikely to get away with profiting at the expense of the environment or society over the long term without incurring regulatory and reputational costs.
By analysing all the factors likely to affect a company’s long-term success, fund managers can evaluate the sustainability of its business model and reach a better-informed value for it. This approach is known as “ESG” investing, where environmental, social and governance factors are integrated into the investment process.
The principles underlying ESG investing are not new, but there has been a surge in investor demand for investment approaches that apply these strategies. As of February 2018, €372 billion was invested in ESG strategies across Europe, according to figures from Broadridge, up from €132 billion in 2010.
Crucially, this approach can not only help reduce the chance that environmental, societal or governance risks will derail your investments, but could also help deliver more sustainable returns over the longer term.
By valuing companies’ relationships with society and the environment, your investments could be put to better work.
2. Finding your voice
Active, informed investors can help shape a better future by exerting positive influence on the companies they invest in.
By engaging effectively on your behalf, investment managers can act as agents for positive change. As well as advocating sound and sustainable decision making, and encouraging best practice, active investors can take companies to task over bad practice. They can even sell up if issues cannot be remedied.
Investing with an investment manager that engages actively can make our collective influence greater. A large investor can engage in dialogue with company management – and with clout. This influence can be amplified by acting with other investment managers where there is common concern or interest.
Engagement is often focused on specific areas, such as board diversity or executive pay, but can go further to challenge bigger issues relating to a company’s impact on the environment or society. Companies can be challenged over their approach to climate change, for instance.
Ultimately, this degree of influence can allow individual investors to find a collective voice that can help bring about sustainable long-term change.
- 2 ºC – The Paris Agreement committed to keep global temperature rises this century well below 2°C above pre-industrial levels – and to pursue efforts to limit the temperature increase to 1.5°C.
- US$14 trillion – Estimated investment needed in global renewable energy infrastructure by 2040 – twice current levels .
Source: Bank of America Merrill Lynch.
3. Joining the green finance revolution
Curtailing carbon emissions in order to limit the effects of climate change is a defining challenge of our time.
To set the world on a more sustainable path, the Paris Agreement of 2015 committed the world’s governments to keep the increase in global temperatures well below 2°C above pre-industrial levels. Many economies have set ambitious targets for cutting greenhouse gas emissions – the European Union is targeting a cut of 40% by 2030, compared to 1990 levels.
To meet the Paris target, it is estimated that US$14 trillion will need to be invested in renewable energy infrastructure by 2040. This means current levels of investment need to roughly double.
Green finance is the key to this transformation. Great strides have already been made, with private investment in the likes of wind farms and solar parks raising renewable energy capacity around the world. For investors, the potential of reliable and growing income streams that these assets have the potential to generate can be highly attractive.
Growing interest from investors, led by institutional investors like pension funds, has fuelled innovation from the financial industry. The range of environmentally-focused or ‘green’ investment products, that aim to target better outcomes for the environment, is ever expanding.
There are therefore more and more ways that investors can use long-term investments to help shift our economies towards a more sustainable future.
4. ‘Future-proofing’ the built environment
Buildings are responsible for using around two-fifths of global energy usage and contribute around one-third of greenhouse gas emissions1. Cooling, heating and lighting our homes, shops and offices more efficiently can therefore make a major contribution to mitigating climate change risks.
The International Energy Agency estimates all new buildings will have to be zero carbon by 2030 if we are to meet Paris targets. All existing buildings would need to join them by 2050. To significantly reduce the carbon and ecological footprint of buildings, significant amounts of investment will be needed.
The social aspects of sustainability, including enabling healthier lifestyles, a greater sense of wellbeing and community cohesion, are also integral to shaping the future of the built environment. Most buildings and infrastructure tend to have long lives and therefore require investment to meet the demands of society and businesses – especially in an increasingly connected and digital world.
Meanwhile, access to affordable housing plays a significant role in determining physical security and increasing economic and social inclusion for people priced out of the rental market. For those living in rural communities, this extends to creating access to transport networks, shops and services, as well as improving mobile and broadband coverage.
Investing in “real” assets such as real estate and infrastructure can be out of reach for individuals, but investing with a large investment manager can enable you to benefit from their scale and expertise and gain access to large, diversified portfolios of real estate.
Together, your investments can help “future-proof” our built environment, and tap into the long-term opportunities that come with addressing pressing societal and environmental challenges.
- 17 UN Sustainable Development Goals – Adopted by UN member states in 2015, they articulate the world’s most pressing sustainability issues to overcome, in order to “end poverty, protect the planet, and ensure prosperity for all”.
- US$5-7 trillion a year – Estimated annual investment needed to realise the UN Sustainable Development Goals from 2015 to 2030 .
Source: UN Commission on Trade and Development.
5. Targeting profit, with positive impact
If non-financial goals are as important to you as financial returns, you can explicitly target investments that also deliver positive change for society or the environment. This is known as impact investing.
The objectives of impact investing are to pursue long-term financial returns, alongside shared returns for society or the environment, by investing in companies or initiatives that intentionally deliver wider benefits through their activities. It is this dual objective that sets it apart from philanthropy, and this intentionality that makes it distinct from other approaches to responsible investing.
Companies can deliver a positive impact through pioneering products or services, by driving sustainability improvements in their sector, or even by providing other companies with the tools they need to deliver impact.
Impact investments can allow you to contribute to tackling the world’s most pressing challenges – from climate change and pollution, to better healthcare and education – while generating sustainable financial returns for you over the long term, if they prove successful.
Partnering with a responsible investment manager
There are more opportunities than ever to invest responsibly. When weighing up your options, it is worth bearing in mind that not all investment managers look at things the same way. It is important to partner with one that shares the same commitment to putting your investments to work responsibly.
Active investment managers are well placed to match your savings with the global challenges that targeted finance can help address.
By partnering with an investment manager that is committed to investing responsibly, you can help shape the future of society and of the planet for the better – while pursuing financial returns for you to enjoy a brighter future.
1Source: International Organization for Standardization (ISO), “Measuring the carbon footprint of buildings in a simple way”, 7 July 2017