Francis Menassa: Eyes on Sustainable Investments, Explained
Francis Menassa says: “A noticeable uprise for sustainable investing, also known as socially responsible investing (SRI), has made a dent in the last years, particularly bringing in rocket-soaring numbers up to $8.9 billion for the first half of 2019 in the US, roughly more than 60% than the previous year as a whole”.
Once upon a time, sustainable investing took just a small piece of the pie, but today represents over one-in-four dollars near $50 trillion in assets under management throughout the US alone, confirmed by a study from Morgan Stanley Institute for Sustainable Investing stating that 84% of asset owners are now pursuing or considering sustainable investment strategies.
Let’s dig deeper, why the boom with sustainable investment?
Expansion & Developments in the Investment World
By being conscious about our environment and understanding what it means to be responsible in order to make a positive social impact strongly correlates to how the attitudes of investors has transformed- just as in the way sustainability plays a tremendous role in consumer behavior, especially purchasing decisions, when two-thirds are willing to pay that much more for sustainable goods. Today investors seek companies who operate responsibly, and truly provide sustainable goods and services rather than profiting from just a cut-throat agenda.
Values have taken stand, so investors begin to care about which companies incorporate what they believe in- while sustainable investment strategies, with their focus on environmental, social, and governance (ESG) factors, enable investors to generate a financial return in addition to the contribution made for society. It’s a win-win situation for investors to be able to pick and choose companies best fitted along their ideology rather than opting for those who don’t. A stark difference from investor mentality in the past, ‘many fund groups now incorporate sustainability at the heart of their investment strategies” according to Francis Menassa, Principal, JAR Capital.
Dutch pension fund ABP, recently completed the divestment of €4 billion worth of holdings in nuclear arms manufacturers and tobacco producers due to the fact that these investments no longer match the fund’s objective to invest sustainably and responsibly. Meanwhile, Pensioenfonds Detailhandel, another major Dutch pension fund, also divested almost a third of its portfolio recently to refocus its investments on human rights issues, labour conditions, and climate goals.
Kudos to the team at JAR who has been managing sustainable investment funds for over seven years and in that time, Francis observed a growing number of US family offices incorporating sustainability metrics in their investment analysis by affirming: “sustainability analysis will become a fundamental part of all investment analysis”.
Continuous Proposals for Sustainability
It’s necessary to add to the equation the significant increase in the number of sustainable funds over the last few years. Offerings were few and far between for those who were looking to invest responsibly in the past. However, as interest in sustainable investing has increased, asset managers have responded to the demand and in Europe alone, there are now close to 2,500 ESG funds available to investors. Moreover, a number of prominent investment firms have launched ESG products, and their marketing strength has meant that these products have become highly visible to investors.
For good measure, a substantial increase in the number of sustainable exchange-traded funds (ETFs) and the greater availability of passive investment funds has been another key driver for investments. According to Morningstar, there were only two ESG-focused ETFs that were available to US investors in late 2014, however, today there are nearly 50 sustainable ETFs available in the US, covering a wide range of asset classes. “There are a lot of investors who would like to invest in ESG, but haven’t done so yet partly because there weren’t low-cost, passive options available. Now there are” says Jon Hale, Morningstar’s director of sustainability research: given the formidable rise in the number of sustainable investment offerings – both active and passive – it’s now easier than ever to invest sustainably.
Investing sustainably meant risk and investors naturally deterred in the past. Now, a number of sustainable funds have beaten the market and delivered excellent returns for investors.
See Figure 1:
European-domiciled sustainable funds as a group outperformed the overall fund universe. 32 percent of sustainable funds placed in the top quartile of their respective Morningstar categories, while 62 percent finished in the top half. By contrast, only 17 percent of sustainable funds were placed in the bottom quartile.
Sustainable funds often outperform because companies with strong ESG focus tend to be higher-quality companies that hold up better during market downturns. As a result, stocks or bonds with higher ESG scores can outperform the market over time. According to Panos Seretis, executive director of ESG research at MSCI, better management of environmental and social risks and opportunities leads to higher MSCI ESG Ratings, which, in turn, is associated with both higher return on invested capital and higher valuations. Seretis believes that ESG scoring could be a way to enhance company analysis beyond more traditional financial metrics.
In turn, government policy is also driving the growth for sustainable investing.
The EU’s 2014 Non-Financial Reporting Directive, implemented in late 2017, was formulated to encourage European companies to develop a responsible approach to business, requiring companies to disclose information about how they manage social and environmental challenges, allowing investors to evaluate companies’ non-financial performance.
The newly established Directive provides fixed-income investors with an abundance of information in order to conduct more thorough ESG analysis, where, in the past, incorporating ESG factors into fixed-income investment analysis was quite challenging – there were no ESG credit ratings as ratings agencies had very little access to ESG information. “The EU Non-Financial Reporting Directive is another tool that enables us to conduct more thorough due diligence of a company; the balance sheet, governance structure, and environmental issues to name a few. The better we understand a company, the more we can minimise our risks,” says Francis Menassa. Companies seek to reduce their environmental and reputational risk while upping their communication to investors since the Directive, therefore more investment opportunities for sustainable fixed-income investors are available. According to Francis Menassa, fixed income “now accounts for over a third of responsible investing”.
To conclude, investors are watching sustainable investments like a hawk due to their increased awareness on the subject of environmental issues, a rise of sustainable investment offerings, strong investment performance, and major policy developments. From niche to trend, sustainable investing is here. Perhaps unique investments are paving the way to what the future beholds.