By David Bailin
Chief Investment Officer
Harlin Singh, Global Head of Sustainable Investing
March 23, 2021Posted InInvestment Strategy
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Sustainability is an increasingly important consideration in investment decision-making. Failure to consider it could prove an expensive mistake.
In past years, an investor could emphasize or ignore sustainability factors at their discretion, with personal views not market fundamentals driving their choice. But that has been changing rapidly, with sustainability increasingly functioning as a driver of performance and portfolio stability. For instance, according to Morningstar, in Q1 2020, sustainable strategies saw a net inflow of $45.6BN, compared to an outflow of $384.7BN for the overall fund universe amid the coronavirus pandemic market sell-off. Global sustainably invested AUM (measured primarily by ESG data integration) reached $40.5T in 2020. That represents roughly 33.8% – 40.5% of the estimated $100T - $120T total global AUM under professional management.
Despite how often it is talked about, we are often asked: What is a sustainable investment? Broadly, sustainable investing encompasses many different methods, and means different things to different investors, but the end goal is to use Environmental, Social, and Governance data to ensure that an investor’s core portfolio is constructed in a manner that accounts for not only what each company is doing business in – but also how each company is doing business.
This ranges from excluding companies that don’t meet the investor’s values (i.e. excluding "sin" stocks) to evaluations of whether a business has a sustainable business model or has a place in a future sustainable economy. Thus, sustainable investing has shifted from primarily focusing on a short list of exclusions or inclusions to broader thematic views. For example, we see many strategies exclude the entire fossil fuels sector both because of the harm caused by greenhouse gas emissions but also due to the risk to those assets in a world shifting towards a post carbon future. The shift from values-alignment to a concept of “do no significant harm” has been the primary driver of a growth in the list of portfolio exclusions. On the other end of the spectrum, are investors seeking value in sustainable themes – such as renewable energy, clean water, affordable housing, and healthcare.Download: CIO Strategy Bulletin