Covid-19 spurs wave of interest in sustainable investing

However, there are still challenges to overcome to make sustainable investment effective and measurable, the study noted.

The survey polled 750 global institutional investors covering $26.1tn (£18.9tn) in assets. It found official institutions, including national pension plans, were much more likely (at 70 per cent) to cite Covid-19 as making sustainable investment “significantly more important” than for insurance institutions (57 per cent) and corporate pension plans (49 per cent). 

We recognise the problems with metrics in other contexts but forget about them when it comes to companies. Not everything that counts can be counted; not everything that can be counted counts

Alex Edmans, London Business School

Engagement remained more popular than divestment strategies, and 57 per cent of respondents reported that engagement should be measured by “real world outcomes” that demonstrate “measurable improvement” for stakeholders.

Among European managers, 56 per cent said engagement would be considered successful if it achieved “more transparent reporting”, 42 per cent said it would be deemed so if the “engagement insight or outcome” is “directly reflected in the investment case”, and 37 per cent if it led to “consistently voting against companies in order to drive change”.

The environment and climate change were the key focus of 64 per cent of respondents when it comes to engagement, with employees — the treatment of staff and workforce diversity, for instance — running a close second at 61 per cent, a figure the survey said was influenced by job losses and other workforce concerns brought to light during the pandemic.

Tim Orton, managing director for investment solutions at Aegon UK, told Pensions Expert: “The pandemic has both given many of us time to pause and evaluate what’s important, but also accelerated many trends that were present beforehand.

“A good example of this is the focus on climate issues and we’re seeing strong demand from savers to take action, with 45 per cent of our customers telling us net-zero investing should be made mandatory.” 

Trials and tribulations

The survey showed that investors’ concerns that investing sustainably may hamper performance have fallen for a fourth consecutive year. While 48 per cent of respondents cited this fear in 2019, that figure was 45 per cent in 2020 and reached a low of 38 per cent this year.

However, 80 per cent of respondents globally said that sustainable investing was either somewhat or very challenging.

More than half (59 per cent) of respondents cited fears about greenwashing, while the lack of transparency and data around sustainable investing was a concern to 53 per cent of respondents.

A further 46 per cent cited “difficulty measuring and managing risk” as a key challenge to be overcome. The study attributed this figure in part to the rapid recent growth of environmental, social and governance investing, the lack of consistent standards and metrics, and the fact that some regulatory interventions have yet to take full effect.

Will Martindale, group head of sustainability at Cardano, told Pensions Expert that in addition to data availability and reliability, “there remain methodology challenges in climate target setting, as well as metrics in hard-to-reach asset classes such as private equity, infrastructure, or derivatives”.

He said: “We believe [Task Force on Climate-related Financial Disclosures] reporting is an important first step. We’ve called on the [Financial Conduct Authority] to bring forward its deadline for asset managers to disclose in 2022, in line with UK pension funds.”

Legal & General Investment Management shared with Pensions Expert the results of a June survey showing that member understanding of terms like ‘net-zero’ is itself a challenge. Eighty-seven per cent of defined contribution scheme members polled did not understand the importance of net-zero, while a quarter had never even heard of it, the survey found.

Despite this, most members were “overwhelmingly in favour” of moving to net-zero “once the term was explained”.

Almost three quarters (70 per cent) of members preferred to stay invested and use their power to effect change, while 64 per cent have become more concerned about the planet following the Covid-19 crisis, the LGIM survey found.

Simon Chinnery, LGIM’s head of DC client solutions, told Pensions Expert: “The industry and regulators need to help consumers to quickly and easily see the environmental impact of their investments.

“We have seen European regulation start to tackle this with [Sustainable Finance Disclosure Regulations], and other regulators [starting] to look at a common approach to product classifications. While we are seeing things improve with greater availability of data, there is still a lot to be done on this front.” 

However, Alex Edmans, professor of finance at London Business School, warned against viewing improved data and standards as “a panacea”.

“Sustainability isn’t something you measure; it’s something you assess,” he said. 

“Something intangible — be it sustainability, management quality, corporate culture — can never be measured. This isn’t to say that measures are useless, but that we need to take into account that any measure will be incomplete,” he explained. 

“For example, measuring the average ESG scores of the companies that an investor holds will punish investors who hold troubled companies and try to turn them around. Measuring the average wages paid by those companies ignores other dimensions of worker welfare, such as meaningful work and skills development.

“We recognise the problems with metrics in other contexts but forget about them when it comes to companies. Not everything that counts can be counted; not everything that can be counted counts,” Edmans added.

Saving the world or seeking return?

Other challenges include developments not yet priced in by the market. Alastair Greenlees, senior investment strategist at Kempen Capital Management, told Pensions Expert that a recent Kempen study “estimates that a global carbon price increase of $75 on polluting companies could cause a fall in global equities ranging from minus 4 per cent to minus 20 per cent, depending on the range of emissions taxed (Scope 1-2 / 1-3)”. 

He explained: “As the impact of higher carbon prices is not yet priced into markets it represents a real risk to investors. It also potentially represents a real opportunity for investors allocating to the transition economy. We estimate that adopting a climate-positive portfolio could add 20 per cent to returns over the next decade.” 

The Schroders study polled investment managers on the motives driving their interest in sustainability. 

It revealed that more investment managers are concerned about “positively impact[ing] society and the planet” (54 per cent) and “aligning to corporate/internal values” (52 per cent) than are driven by risk management (42 per cent), the potential for higher returns (36 per cent), or member pressure (35 per cent).

Edmans told Pensions Expert that the desire to “positively impact society” is much more difficult to put into practice than it might appear, however.

“Many funds claim to do so by divesting from ‘brown’ stocks, arguing that this starves such companies of capital. This is not the case, because you can only sell your shares if someone else buys them. Selling doesn’t deprive a company of capital,” he explained. 

“Some investors argue that selling drives down the stock price and makes it harder for such companies to raise capital in the future, but many brown stocks aren’t in need of capital — they’re old economy stocks without many new investment opportunities.

“Instead, the best way to positively impact society might be to buy low-ESG companies and engage with them to turn them around.”