Please note: this article is more than one year old. The views of our CIO team may have changed since it was published, and the data on which it was based may have been revised.
In this new report we outline why we believe that environmental concerns represent the most important aspect of ESG investing and why this topic is particularly relevant now. We look further into the impact that technology has on the environmental cause and highlight critical challenges in relation to climate change.
Executive summary
ESG concerns us all. The attention to environmental, social and governance issues is not a niche, it is a universal theme that is relevant for everybody. However, it is investors who are particularly concerned, because their investments inevitably have an impact on environmental, social and governance matters, and because ESG factors in turn can impact an investment’s financial return.
“The environment is the most fragile part because in most cases, damage that is done cannot be reversed”
The risks of inaction are substantial. Inaction has negative consequences for the world we live in and comes with concrete economic and social costs. Environmental negligence can destroy our living space, without attention to social matters we sacrifice human capital and hence productivity, and, finally, lack of governance creates wrong incentives. While environmental, social and governance criteria represent three aspects of the same basic principle of sustainability, the environment is the most fragile part because in most cases, damage that is done cannot be reversed. Burned rainforest cannot grow back easily, desertification as a consequence of harmful soil management is hard to reverse, and pollution is fiendishly tough to clean up. Therefore, we believe that the “E” in ESG merits special attention. Incidentally, environmental protection, far from just being a cost, may well end up being the aspect of ESG offering the biggest rewards for investors.
"Clean air is no longer a 'nice to have' that requires a compromise on GDP growth"
Until fairly recently, environmental damage was tolerated as an unwelcome but acceptable side effect of economic growth. Successively, it was seen as a trade-off: pollution was considered to be a price to pay for faster growth. Now, however, we are witnessing that pollution is starting to reduce economic growth. Thus, clean air is no longer a “nice to have” that requires a compromise on GDP growth, it has changed into a means to boosting GDP growth. In other words, pollution is not a side effect of economic development, it has become a hindrance to it. Consequently, environmental protection is not a luxury, it is an economic benefit, apart from being a benefit in terms of human welfare.
“Money spent on environmental protection, such as clean air and water, is not just a cost, it is an investment that produces a measurable return”
The consequence of this is that money spent on environmental protection, such as clean air and water, is not just a cost, it is an investment that produces a measurable return. Herein lies the key to the “E” in ESG: pollution has become so entrenched that investments in environmental protection have started producing tangible economic benefits. The day environmental investing is considered to be a sector or an asset class like any other we will have a mature ESG industry.
Environmental concerns do not merely serve to avoid a negative impact on the earth, they can actively create added value by improving our environment, which in turn benefits human welfare and the economy itself. Technology has an important role to play in this regard. The use of technology for environmental matters ranges from cleaner energy production to more efficient use of energy in transportation to a reduction in pollution in manufacturing and industrial production.
It is increasingly obvious that a shift towards investments that enable environmental preservation cannot be accomplished by institutional investors only. Therefore, financial service providers must offer suitable investment solutions to their clients: this shows what a crucial role they play in the achievement of ESG goals.
"A shift towards investments that enable environmental preservation cannot be accomplished by institutional investors only"
The financial services industry equally needs to improve transparency when it comes to the environmental impact of any investment product that it sells. Only when clients are able to appreciate the direct and indirect environmental impact of the investment solutions proposed to them will they be able to make informed decisions about where they are putting their money to work.
To download a pdf of the full report, please click here.
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