Why Sustainable Finance?
Rising inequality and never-ending financial crisis are evidence that our current financial system and growth model does not serve the needs of the real economy and society as a whole.
Fortunately, there is a growing global movement to align the financial system with sustainable development – one that doesn’t sacrifice tomorrow for today. Leading financial centres from Zurich to London to Tokyo and Singapore are taking measures to optimise their financial systems for sustainable growth.
Private capital can play an important role within this transition, as philanthropy and public investment alone cannot fill the funding gap facing sustainable development. It is estimated that USD$4-7 trillion of annual investment is required to meet the United Nations Sustainable Development Goals (SDGs), and the current funding gap is about US$2.5 trillion per year. We need private sector-led solutions to meet these challenges both globally and locally.
"The inclusion of the private sector as a stakeholder of the SDGs is practically a necessity"
Former United Nations Secretary-General Ban Ki-moon
What is Sustainable Finance?
There are many definitions for the term sustainable finance.
At SFi, sustainable finance means an investment strategy or financial service integrating environmental, social and governance (ESG) criteria into business and investment decisions, for the lasting benefit of investors and society at large. It is an inclusive term making no distinction between the concepts of sustainable investing, responsible investing, or social responsible investing. Sustainable finance is concerned with investment, not charity. To illustrate what we mean please see the sustainable finance spectrum below. (Tip: always ask what someone means when they use the terms sustainable/responsible/impact investing and see where their definition falls on this spectrum!)
Limited or no focus on ESG factors of underlying investments
Investments are screened out based on ESG risks (negative screening and norms-based screening).
Focus on integration of ESG opportunities to mitigate risk or invest in best-in-class companies, corporate engagement and shareholder action
Targeted themes and financial returns drive investment selection
Investments intended to generate a measurable, beneficial social and environmental impact alongside a financial return.
Financial returns disregarded in favour of social and/or environmental solutions
What is it Not?
Sustainable investing does not necessarily mean sacrificing financial return.
There is a range of risk-return investment strategies that investors can adopt, depending on desired risk, return and impact profiles. Some investors may want to focus on environmental or social solutions that can generate market-rate financial returns. Other investors are willing to make investments whose impact thesis may not deliver a market-rate financial return. Finally, others are willing to make investments whose impact approach requires a trade-off of financial return in the short term to achieve deep impact.
A growing body of evidence concludes that taking sustainability issues into account leads to better-informed investment decisions, and that leads to better returns in the long-term. One recent study found that over 90% of academic studies show that incorporating ESG standards has a neutral, or even positive, impact on returns.1 Another report analysed 200 studies and found 80% of studies show that stock performance is positively influenced by good sustainability practices.2
Similar Performance of Sustainable Equities
We have selected one example from the sustainable finance spectrum to showcase the performance of ESG indices against its traditional index siblings.
Sustainable Finance in Numbers
Sustainability is on the mind of investors, having grown 57% from 2012 to 2016 to a total of $22.89 trillion (i.e. 26.3% of total assets under management). While Asia ex Japan’s Sustainable Investment (SI) was still only 0.2 per cent ($52 billion) of this growing pool of investment, Hong Kong has huge potential – it accounted for 26% of Asia’s SI (after Malaysia at 30%, ahead of South Korea and China both at 14%). And of all the SI strategies deployed, exclusionary screening is currently the most popular globally, but in Asia ex Japan the strategy of ESG integration leads.
Sustainable Investing Market Size
Sustainable investing is the fastest growing segment of the investment universe today.
Source: Global Sustainable Investment Alliance (2016)
Sustainable Investing is Growing
Global sustainable investment reached $22.89 trillion (26% of global AuM) in 2016. Asia (excluding Japan) accounted for 0.2% of global SI assets. Hong Kong accounted for 26% of Asia’s SI assets.
Source: Global Sustainable Investment Alliance (2016)
Global Sustainable Investment Alliance (GSIA) reports this data as SRI assets, which is the same way SFi uses “sustainable investing”(SI) assets. It is an inclusive definition of sustainable investing, without drawing distinction between SI, responsible investing (RI) and socially responsible investing (SRI).
Sustainable Investing Strategies
The largest sustainable investment strategy globally is exclusionary (negative) screening followed by ESG integration.
All numbers are in USD. Source: Global Sustainable Investment Alliance (2016)
What does a 100% sustainable portfolio
Each investor has their own passions and risk-return expectations. Here is one example of a 100% sustainable portfolio.
Please note this is for illustrative purposes only and is not an exhaustive list of financial products available – we have selected Listed Equity, Fixed Income and Alternatives/Cash to illustrate the various financial products available across Exclusions (SRI), ESG Integration & Engagement, Sustainable Thematic Investing and Impact Investing.
- Bassen, A., Busch, T. and Friede, G. (2015) ESG and financial performance: aggregated evidence from more than 2000 empirical studies. Journal of Sustainable Finance and Investment. Vol.5.
- Clark, G., Feiner, A., and Viehs, M. (2015) From stockholder to the stakeholder – how sustainability can drive financial outperformance. Oxford University & Arabesque Partners..