TRADE & FINANCE 31
Why should sustainable investing be a priority in 2014 ?
Climate change , resource constraints , environmental degradation and social and economic inequality are just some of the challenges that we now face . Simple acknowledgement of these challenges demonstrates that prevalent economic growth models are not working .
We stand at a point in time when investors can be a force for positive change . Investing approaches are integral to economic growth , with investors having immense influence as the decision-makers over how much of our capital is employed .
Creating a transformative shift …
However in order to achieve this , investors must think beyond financial return and to the broader impacts that economic activity can have . Today ’ s economic circumstances necessitate such a shift .
The Global Financial Crisis of 2008 bore witness to the challenge at hand – imploding asset bubbles , accounting scandals and serious governance lapses have drawn attention to the fact that financial market actors are often driven by short-term goals and fail to maintain a long-term perspective that looks beyond the next financial year .
We need investors to think in terms of 10 , 20 , 30 years and beyond – and this shift in mindset needs to be mainstream .
What happens next – leveraging the power of sustainable investing ?
One of the central challenges to be addressed is the need for existing capital market structures to be reformed , to facilitate better capital allocation and better understanding of risks . Through financial market reform – on a national , regional and international level - the concepts of prudent financial risk management and longtermism can be defined in the language of investment professionals and embedded in the governing regulatory frameworks .
With greater policy certainty and regulatory structure , the investment industry can be incentivized to develop the appropriate tools and techniques required to quantify and manage the risks we face : risks associated with climate change , social dynamics , sustainability issues , risks that have often been ignored and deemed too difficult to define .
Our markets require a framework through which to adequately price these risks – and this must begin with pricing externalities and valuing natural capital . Basic economics tells us that our markets have been operating inefficiently , with our insatiable demand for ‘ free ’ public goods , without acknowledgement of the real costs that this incurs to society . Governments should send the right policy signals by putting a price on carbon and removing fossil fuel subsidies .
Emerging trends – positive developments are occurring …
In 2012 , the Global Sustainable Investment Review ( published by the Global Sustainable Investment Alliance , of which ASrIA is a founding member ) found that globally at least US $ 13.6 trillion worth of professionally managed assets incorporate environmental , social and governance concerns into their investment selection and management .
This represents 21.8 percent of the total assets managed professionally , indicating that sustainable investing is becoming a viable force for change . Geographically , this is highly varied – with greatest traction in the North American and European markets – but with the greatest opportunity in emerging markets , and Asia in particular .
Positive trends are emerging . For example , increasing pressure from all corners on disclosure , reporting and transparency is facilitating financial market reform . Better information will allow investors to make smarter investment decisions . Debate on key issues such as fossil fuel investment is becoming increasingly heated and finally investors and policy-makers are beginning to take note .
Sustainable investing – steps to support the vision for the future ?
There is a long way to go – but , through leveraging sustainable investing as a driver for positive change , much can be achieved . In order to create this vision for the future , leadership is required . So what steps can be taken to support this ?
■ Policy-makers should focus on aligning the financial system with the needs of the ‘ real economy ’ – in particular , to ensure that investors and other market actors look ahead to the next 20 to 50 years ;
■ Greater emphasis should be given to educating investors – whether institutional or retail – on the types of investment opportunities that exist ;
■ Focus should be given to scaling up investor holding of long-term assets , particularly infrastructure investments , by lowering cost of capital and facilitating longer term debt ;
■ Investors should be encouraged to facilitate corporate change through mechanisms such as shareholder engagement , asset allocation and credit policy ; and
■ Policy reform should reflect changing societal values , facilitating long-term objective setting with policy practices and financial instruments that underpin this .
Sustainable investing requires a re-setting of market mechanisms to recalibrate the decision-making process governing the use of economic capital . Sustainable investing is about sound risk management – but more than simply improving risk-adjusted performance , sustainable investing can provide a response to the unsustainable economic and industry trends of recent years , to result in a better tomorrow . ■