- Financial Services
As investors’ priorities evolve, we consider how the desire for sustainability is likely to determine the global business and investment landscape.
Sustainability is emerging as a driving force behind many investor (and consumer) decisions.
Investing on a ‘green or ethical’ basis was once seen as a niche area, and not -necessarily one where profits could be made.
But over the last decade, ethical investing has become mainstream; because the definition of ethical has itself expanded and replaced with the concept of sustainability.
Profit, people, planet?
Sustainability is about meeting present needs, but not so much that it prevents future generations meeting theirs.
David Attenborough summed it up when he asked whether it was possible to do something forever. If the answer was ‘yes’ then the action is/was sustainable.
Sustainability’s three pillars: economic, environmental, and social and known informally as profits, planet, and people.
“The trick is to raise the standard of living of the world without increasing our impact on that world; that may sound impossible, but there are ways in which we can do this.” – David Attenborough
Mats Lundberg, head of sustainability at engineering group, Sandvik, says sustainability is being driven by investors.
“Sustainability is now at the top of the agenda among investors, and with that change, a credible sustainability strategy is crucial for the business and its brand.
“A rising number of customers will choose products based on their reduced environmental impact. As society becomes more aligned with environmental, social, and corporate governance (ESG), so must businesses.”
What investors want – to know how to invest sustainability
Investors want to choose sustainable collective investments. They are more likely to prioritise responsible investment than traditional returns.
In 2020 funds that invested directly or indirectly in companies committed to solving climate change saw some of the highest investor inflows globally (Morningstar).
So, it would seem financial services companies don’t really have a choice.
A global study of 550 financial services professionals conducted by iResearch Services found that nearly 50% believe sustainability will drive new customers.
Bringing new clients on board will require more than just badging a fund sustainable.
A survey carried out by London-based investment manager Close Brothers found ‘not even’ one in five (18%) investors know what the term ‘SRI’ means.
Close Brothers found that three quarters of investors did not understand ‘impact investing’, ‘ethical screening’, ‘greenwashing’ or the ‘UN Sustainable Development Goals’.
So, education is key if financial services firms are to realise their belief that sustainability will drive new customers.
Verdict: The want and need are there, but investors will need companies to provide more transparency and clearer language to help them invest more sustainably.
What investors want – authentic sustainability – an end to greenwashing
Greenwashing remains a major concern among investors.
Consumers can quickly get jaded, and it will be up to companies to come up with interesting and unusual concepts as well as proving their green credentials.
More than half of businesses in the financial services industry believe at least some competitors are deliberately ‘greenwashing’ to mislead customers about their ethical practices, according to a global study of 550 financial services professionals conducted by iResearch.
Just how possible is it to eradicate greenwashing? It is something the UK regulator The Financial Conduct Authority (FCA), was looking at before Covid-19.
In 2019 a report from SCM Direct, Greenwashing: Misclassification and Mis-selling of Ethical Investments, raised the issue of greenwashing.
Jemma Jackson, spokesperson at interactive investor said the report had helped to highlight what huge scope there was for disagreement as to what should be labelled ‘green’ or not’
She said: “At what point a company stops being unethical and starts to become ethical is hugely open to interpretation and a matter of personal opinion.”
Interactive Investor points out that both the “still maturing” ethical investing sector is trying to navigate its way through all these issues, alongside the wider investment industry too.
“Using data alone to differentiate between investments runs the risk that people will play the ESG language bingo game, littering their prospectus with relevant terms.
“This may be a cynical attempt to try and suggest a greater emphasis on ethical investing, but it could simply be that some of the terms that are more prevalent with ethical investing, such as sustainable, may not necessarily always just apply to socially responsible investing.”
She said the inherent conflicts in the ethical investment industry was exactly why Interactive Investor sought independent expert advice from SRI Services when it launched its own ethical investing long list
It came up with three simple ethical styles that were deliberately jargon free: ‘avoids’, ‘considers’ and ‘embraces.’
“However, at no point have we suggested that any individual style is a good fit for all.
“Strategies vary enormously and within our list there are a vast array of different approaches.”
Julia Dreblow, founder, SRI Services and Fund EcoMarket, pointed out: “ESG ratings are very different from understanding policies and criteria as, for example a tobacco, oil, bank or pharmaceutical company can have excellent ESG strategies and be highly thought of by ratings agencies, but that does not make them ‘ethical’.
Dreblow added that: “Investors really need to know their own ethical profile” and that “those who work within the industry have spent years trying to manage these moral and ethical conflicts” and that brave strategies to deal with the issue of greenwashing may yet need to emerge.
Verdict: The industry needs to come up with a greenwash-proof strategy to convince investors what they are investing in is sustainable and not some marketing gimmick.
What investors want – sustainable technology
The way we work and communicate has been slowly changing for years.
The roll-out of the internet and the global adoption of broadband technology has altered the way businesses communicate with customers and suppliers, as well as the way employees communicate with colleagues and of course the way we communicate socially.
It has also meant more of us were starting to work from home, even before Covid made it a necessity.
In China, working from home pre 2020 was not an option for many employees.
In February 2020, when quarantine was introduced to stop the spread of the Covid-19 coronavirus local governments and companies across China urged workers to stay at home.
This meant that millions of Chinese people in the workforce ended up working from home for the first time and stocks in video-conferencing apps, Tencent’s WeChat Work, Alibaba-owned DingTalk and the US company Zoom saw their stocks rise.
Michael Nicol, co-manager of the Kames Global Equity fund says the ability to work from home is a sustainability theme. It minimises travel and our impact on the environment and it also taps into the theme of work life balance, another emerging offshoot of sustainability.
Nicol said: “Working from home and relying on remote access will be accepted as an increasingly viable way to operate normally, given companies and their staff are now quickly discovering what is possible, available and reliable in virtual environments.”
“Technological development is the enabler of this progress. Our world will evolve further into the clouds, hosting ever smarter virtual applications that accelerate corporate productivity and efficiencies.”
Verdict: Consumers and investors will want faster internet access and to be able to access it on the move, but this will also impact on their spending/purchasing power
What investors want – less plastic
The marine plastic issue has made for the most visually powerful images of the last few years. Photographs and videos of attempts to clean up plastic from the oceans have commanded global attention.
Programmes such as Sir David Attenborough’s The Blue Planet series for the BBC and, more recently, his Netflix offering A Life on Our planet , have brought to the public consciousness the need to remove plastic from the ocean.
Mary Jane McQuillen, portfolio manager at ClearBridge Investments, believes investors and consumers will force companies to look at the way they package products. McQuillen points out that sustainable packaging is an issue that unites Baby Boomers, Millennials, Generation X, Y and Z:
“Many packaged goods companies have acquired approximately five years’ worth of new consumers since March 2020.”
“While not all will be kept, the industry has woken up to the increased relevance of sustainability credentials for both their consumers as well as their investors, with data showing consumers, especially younger ones, are willing to pay more for sustainable brands.
“An increased focus on packaging, as well as sustainability across the whole product lifestyle, from regenerative agriculture to recycling/waste reduction, should be a differentiator in the space in the coming years.”
“Investments for the longer term, such as helping fight climate change by lowering carbon emissions or overcoming resource scarcity through use of recycled materials.
Verdict: It may sound niche, and it’s taken a back seat in the news during the Covid pandemic, but how we deal with plastic could emerge as a major contribution to sustainability.
What investors want – sustainable healthcare
Another strong trend – brought to the fore by Covid – is the theme of healthcare, and the role of pharmaceuticals.
The pharmaceutical industry has been viewed with a jaded eye by many consumers; its product – medicine – being a necessary evil. The slow consolidation of the industry probably hasn’t helped, and pricing scandals have dented its reputation.
Investors include pharma stocks in their portfolio, fund managers will cite their ‘defensive’ capabilities and ability to ride out stock market bubbles and volatility; an investment strategy often based on the proviso – better in than out’.
Covid may have changed this.
McQuillen believes the efficacy and the speed at which the two initial COVID-19 vaccines were developed could reignite a global interest in medicine as a force for good, possibly even a sustainable choice.
Can you – should you – make a profit on medicines?
Nicol says investors do not want to make a “binary distinction” between the impact of their investment and the returns they may make.
He says these investors will want to invest in companies “with current or projected net-positive impact and encourage improvement through active engagement with them”.
This means investors will want to seek out innovative companies “positioned for sustained above-average growth but whose products and services facilitate the access to medicines and health care services in both developed and emerging markets”.
For both consumers and investors, it will be about lowering the cost of healthcare. However, companies will need to balance their knowledge – i.e., their patents and research – and learn how to stay profitable when there is a need to transfer knowledge and lift costs to solve global public health issues.
Whether consumers will have a choice, will depend on how open the industry is post pandemic. With such a stranglehold on many medicines, it may take some while for consumers to see their wishes fulfilled.
The provision of healthcare is another priority. As with medicine, Covid has heightened consumer awareness of insufficient healthcare.
Nicol says: “The Covid-19 pandemic has highlighted issues of capacity and resilience particularly in countries where the sector has seen cuts to spending in recent years. ”
“Expect these spending cuts to reverse as electorates demand a more resilient safety net for the day when they come to rely on the healthcare system they have funded.”
“This may require a rethink in terms of some of the social contracts in place between the public and the health sector, especially with regards to the level of private sector involvement in healthcare provision and the size of contribution that individuals expect to make.
Consumers will as a result demand value for money, particularly “in areas where there is little innovation, like generic drugs and relatively standard equipment and medical procedures.”
Verdict: Healthcare is an emerging sustainable theme, but is very much led by global government policy and we may have to wait for the impact of Covid-19 to sink in.
What consumers want – sustainable society
Socioeconomic inequality and exploitation have appeared to go hand in hand with modernisation,
Capitalism has brought growth but “relies on underdevelopment to compensate for overdevelopment in order to exponentially grow”.
This selective growth has allowed modernisation through “urbanisation and resource exploitation” but at great cost to the environment.
Demographic changes have the potential to bring about wholescale change to investment theory as millennials, poised for what Nicol calls the “Great Wealth Transfer” coming their way, start to flex their economic power.
Eventually evolution will mean there is no longer a sole focus on just profits but on long-term viability. That viability will be based on how sustainable the business is and whether it relies on exploiting other human beings to make a profit.
Verdict: Equality, equity and ethical practices are emerging as another post Covid-19 and indeed parallel theme.
What consumers want – big business and mental health t thing
A report from global management consultancy B+A – which works with Nike, Lego, Kellogg’s, Samsung – revealed that global trust in governments declined post pandemic.
B+A’s survey found people were placing more trust in charities and companies when it comes to protecting their long-term health.
Half the people who took part in a global survey said they would purchase a product based on how that business had acted during Covid-19.
Just over three quarters (77%) said they would take business behaviour during Covid-19 into consideration when choosing a place to work.
Overall, 78% believe humans will emerge from this crisis stronger, but optimism per country varies in line with COVID-19 death rates.
A small percentage of those who took part in the survey also said they were starting to view mental health as more important than climate change.
Verdict: people are prepared to trust businesses, but this survey also points out another potential emerging theme- mental wellbeing.
What investors want – security
Investors continue to face immediate issues: are their savings and/or investments safe now, and will they be safe in the future?
Consumers want to know if their jobs are going to be there, and that they can pay the bills. Some might want to be looking at retirement, depending on their age; or whether they can afford to retire.
Unfortunately the pandemic served to highlight just how financially insecure many people are, in the UK alone 1.8 million people are estimated to have taken up the government imposed mortgage repayment holiday (UK Finance).
But these issues existed before the pandemic – Swiss Re has been warning of the protection gap for years. The reinsurer estimates that globally adults are underinsured by US$114 trillion: the difference between the amount of insurance coverage that is economically beneficial – i.e., when a claim needs to be paid out – and what insurance is purchased.
Whether, post pandemic, consumers will save more generally, remains to be seen. The need to build financial resilience has certainly been highlighted starkly in recent events.
We do know that higher income families ended up saving more – 28% of families – while 20% of families depleted their savings.
The Bank of England said that households whose savings increased due to the pandemic were much less likely to have seen their incomes fall (for example, because of furlough or unemployment) than households whose savings decreased.
What do investors really want?
We ask ourselves, amid all this change, what do investors want? Using their financial clout to power change for the good: climate change, equality, an end to global poverty. All of these can be considered laudable.
Nicol believes investment themes post-pandemic are the same as those pre-pandemic, but things have essentially been ‘fast forwarded’ through the demands of the modern world post Covid-19.
The Covid-19 pandemic has allowed many investors and consumers to step back and reassess their priorities.
- Environmental – with more people working from home, in many cases spending less and travelling less; there was an immediate impact on the environment
- Technology – societies became more reliant on technology on several levels – for communication, for provision and for education.
- Mental and physical health – with a need for global equality of health care
But wants and needs can often clash; it may end up being what investors need rather than want that determines what ends up being on offer. For example, the emergence of mental health and packaging as sustainable issues.
Whatever other themes continue to emerge – sustainability is most definitely here to stay.Back to Blogs