Finance Monthly January 2020 Edition

There was once a time that investors were only interested in one thing, profit and achieving a return on investment. In the past, this has seen many investors making money from unscrupulous means. Investing, even unwittingly, in companies or stocks linked to arms, tobacco, big pharma or similar questionable operations seemed just another way to make money but as the world wakes up to a sea change in terms of environmental and ethical investing, there has been a rise in the past few years of ethical, or what some are dubbing ‘sustainable’ finance. Whilst it would not be prudent to try and compare the returns from the ‘old stock’, such as tobacco, alcohol and arms, with the new green kids on the block, many experts are suggesting that ethical investing is on the brink of something big. The suggestion across the board is that investors are finding that if they are good to the planet and to people, they also end up, on average, benefiting themselves. There is mounting evidence that funds which observe environmental, social and governance standards in their strategies tend to outperform those that don’t by a significant margin. Could 2020 be the year we see this kind of thinking take ahold? Only time will tell, but what has been happening so far? WHAT IS SUSTAINABLE FINANCE? According to the Global Sustainable Investment Alliance (GSIA), an umbrella group, around $23trn, or 26% of all assets under management in 2016, were in ‘socially responsible investments’ that take account of environmental, social and governance (ESG) issues. The actual definition of sustainable finance differs on who you ask. For some, it simply comes down to what most would term routine or ‘normal’ investments. There exists a certain group of companies and investments that are separated into what the GSIA term ‘negative screening’ which are considered unethical or untrusted. The other definition is, of course, those that actively create a positive change in the world. These have been referred to in recent times as ‘impact investments’ meaning that in these situations, a precise impact can be quantified and measured. This all adds up to a long-term strategy that matches the hopes that the global industry has for such finance initiatives to make a real difference. An immediate example of this could be the reduction in the amount of carbon dioxide emitted by a production facility or manufacturing plant or the amount of education delivered to underfunded or poverty-stricken schools in a developing country as a result of a particular project. Although quite different from traditional ways of measuring investment success, this presumes that financial return does not need to be sacrificed to also enjoy non-financial goals. The likes of theWWF are working on ways to encourage more ethical investments, leading to sustainable finance being exactly that, sustainable. For example, The International Energy Agency estimates that vv in cumulative investment directed mostly towards renewable and other low carbon energy technologies, as well as energy efficiency measures, is required to keep global temperature rise to below 2C and avoid the worst effects of global warming. The sheer scale of capital required for this shift is beyond the scope of public finance alone, meaning that private finance will be essential to the low carbon transition. WHAT KIND OF OPTIONS ARE THERE? Before we jump headlong into 2020, it is important to note that sustainable finance can increase investment risk, and can potentially reduce the investment returns. Sustainable finance can increase investment risk, and can potentially reduce the investment returns. " " 11 www.finance-monthly.com FRONT COVER FEATURE - SUSTAINABLE FINANCE