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Comment: The Power of Impact Investing

Now is Environmental, Social and Governance’s (ESG’s) moment. Or is it?

A machine to suck carbon from the atmosphere (c) Climeworks AG

Based upon the money flows, one would say ESG has been a resounding success. Investors have poured US$54 billion into bond funds specialising in ESG impact so far this year, according to Morningstar, which said 2021 is on track to surpass last year’s record. This is on top of the claims of US$40 trillion committed to ESG. Unfortunately, the money does not seem to have addressed the issues at stake, such as water shortages, biodiversity loss and climate-change destruction.

This is because the methodology used for ESG assessment is not what a company does, but how it reports. Greenwashing is prolific, so there needs to be more transparency.

No doubt there is huge demand to invest in ESG companies. ESG describes a form of investing that has multiple beneficiaries, and not only for the investor. It looks at all risk factors: social, environmental (climate change), governance, as well as financial.

If a company has extraordinary social performance, it often spends less on hiring the best and the brightest and retains them longer, as most employees are looking for some purpose. Additionally, companies that have excellent environmental performance often waste less, pay fewer fines, and use fewer raw materials and energy. All of this leads to higher returns and lower risk. 

The real opportunity for the financial sector is a massive drive for resource effectiveness or efficiency, which is what sustainability is about. Doing more with less. This also translates into more profitability.

When a wealth manager engages clients on ESG investments, that conversation can be much more engaging than traditional investing. Impact investing instils passion and excitement. If one looks at the anticipated transfer of wealth — some US$30 trillion — in the coming 20-30 years to Gen-Z and Millennials, this is a massive opportunity.

Gen-Z values are not only financial. They are more willing to align their values with their investments. As information, education and infrastructure for ESG investments increases, the market will grow even faster.

The market is clearly there, but the way ESG is done now is going in the wrong direction. Fortunately, many asset owners are realising this and demanding investment that is truly regenerative in nature or far less harmful. This message was clearly made with the announcement of the launch of Net Zero Asset Managers. This initiative is an international group of asset managers committed to supporting the goal of net-zero greenhouse-gas emissions by 2050.

Let’s hope this is not another initiative that sounds good but never delivers. 

Robert Rubinstein is CEO and founder of TBLI Group, which aims to create consciousness around sustainable values and lead money flows in ESG.