What makes a great responsible investment? The universe of responsible, sustainable, ethical or “ESG” investment products is growing rapidly, but there is lively debate about their performance, comparability and robustness of processes.
We have invested responsibly in varied forms for decades. Here are four strategies that we believe can be effective, performance-led and target real positive outcomes for our planet.
1. The growing universe of renewable energy
Cutting carbon emissions to limit climate change is a defining challenge that long-term investment can address. The world needs an estimated US$14 trillion of investment in renewable energy infrastructure by 2040 – roughly double the current level – to limit a rise in global temperatures to less than 2°C above pre-industrial levels, as governments agreed in Paris in 2015.
Today, renewable energy investment is accessible in all asset classes from listed equities and bonds to private debt and private equity ownership. This enables an investor to target different return and risk profiles, geographical regions and levels of illiquidity.
Investment in power generation via onshore and offshore wind farms and solar parks can offer income, capital growth and security over assets, while infrastructure such as smart meters, grids and energy storage can provide reliable cashflows, often with an element of inflation protection – all attractive outcomes for investors.
2. Real assets can lead to real change
Buildings consume two-fifths of all energy and contribute around one-third of all greenhouse gas emissions1 as we heat, cool and power homes, shops and offices. The International Energy Agency estimates all new buildings need to be zero carbon by 2030 if we are to meet the Paris targets – and all existing buildings will need to join them by 2050.
The built environment is also critical to social aspects of sustainability, such as enabling healthier lifestyles and community cohesion. Affordable housing can support greater economic and social inclusion, while rural communities benefit from better access to transport, amenities and broadband coverage.
Investments in real estate typically offer secure, steady income streams and potential for capital value growth. Research is increasingly making the link between real estate with high sustainability standards such as energy reduction commitments, better long-term financial returns, and lower systematic risk. Investing with a manager committed to cutting emissions and setting stretching wellbeing targets can help future-proof investment returns as well as the buildings themselves.
3. Make a direct impact
Impact investing is a fast-growing sub-section of responsible investment that focuses on the direct, measurable positive social or environmental impact an investment can produce alongside financial return. From its origins in microfinance and social enterprise, which invest capital for social or environmental gains first and financial returns second, impact investment has entered the mainstream and can now operate at scale in both equity and debt markets.
Many impact funds align their work closely to the 17 Sustainable Development Goals and can demonstrate how their investment choices contribute to tackling challenges from reducing pollution to improving healthcare and education.
Companies can deliver a direct 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. Investors can access positive impact via global stockmarkets through listed equity funds, or by private lending to projects or organisations in debt funds.
4. Take a look at the alternatives
Responsible investment is established in the core asset classes of equities, bonds and real estate, but beyond these lie a wealth of attractive, sustainable opportunities in private and illiquid assets. These can range from direct loans to companies for greener transport, to project finance for innovative energy-from-waste platforms.
Crucially, these are typically sourced privately by an asset manager by drawing on extensive networks of relationships, and are structured and negotiated using specialist expertise rather than being bought via a market or auction. The buyer is able to build into the terms of the transaction the high sustainability standards and monitoring commitments needed to ensure the investment can truly provide environmental or social benefits.
Alternative investments such as private debt have grown significantly in importance to larger investors, whether ultra-high net worth individuals or insurance or pension funds, due to the “illiquidity” premium assets typically offer in excess of returns available on public securities of comparable risk.
The ability to harness this return premium while also delivering meaningful wider positive outcomes is a great incentive to consider an allocation to alternative assets as part of a portfolio mix.
Partnering with a responsible investment manager
There are more opportunities than ever to invest responsibly. Partnering with an investment manager that can demonstrate a track record of investing responsibly can support both your long-term investment goals and put your capital to work for wider social and environmental gains.
1Source: International Organization for Standardization (ISO), “Measuring the carbon footprint of buildings in a simple way”, 7 July 2017
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This information is not an offer or solicitation of an offer for the purchase of shares in any of M&G’s funds. Before subscribing you should read the Prospectus and the Key Investor Information Document. This financial promotion is issued by M&G International Investments S.A., Registered Office: 16, Boulevard Royal, L-2449, Luxembourg and M&G Securities Limited (registered in England, No. 90776), authorised and regulated by the Financial Conduct Authority in the UK. Registered office: Laurence Pountney Hill, London EC4R 0HH. The Portuguese Securities Market Commission (Comissão do Mercado de Valores Mobiliários, the “CMVM”) has received a passporting notification under Directive 2009/65/EC of the European Parliament and of the Council and the Commission Regulation (EU) 584/2010 enabling the fund to be distributed to the public in Portugal.