The rise of sustainable investment has been notable over the past several years as more and more of those investing online demand that their capital goes to companies that adhere to sustainable criteria. The Economist notes that in the USA $8.7 trillion of capital, accounting for 20% of the total capital invested in funds screened for sustainability criteria set by the US Forum for Sustainable and Responsible Investment.
That’s up from around 11% in 2012. It’s a trend also clearly in place in the UK and internationally. The FT reports that Moodys’ data indicates a 7% YoY increase in the sale of ‘green bonds’ over the first half of 2018, with total capital invested $77 billion.
However, there has also been a spate of media coverage over the controversial inclusion of companies that many of those investing online in supposedly sustainable funds would not consider as meeting their personal criteria. Those include major oil companies such as Shell, on the basis of their sustainable energy units. It raises the question of how investors can feel confident that investments they wish to make sustainably are genuinely going into investment vehicles whose make-up they are comfortable with.
The answer appears to be an increasing involvement of academics applying methodologies that would traditionally be employed by government policy makers to classify investments as ‘sustainable’ or not. ESG (Environment, Social, Governance) criteria, it is felt, need to be built on clearer metrics defined by discourse between investors, academics and the companies that offer ‘sustainable investment’ products.
Rob Bauer, director of the European Centre for Corporate Engagement at Maastricht University, is quoted in the Financial Times as highlighting the problem as:
“There is a lot of blah-blah [about ESG] going on in the market, in my opinion, and academics have a role in showing that. If you base your investment strategy on some of this data, you are fooling yourself.”
The solution is creating methodologies for sustainability assessment based on defined criteria. For example, at the behest of several pension funds, Mr Bauer, along with a team of other academics, created the Global ESG Benchmark for Real Estate tool. It measures the sustainability impact of real estate and infrastructure assets.
The need for the involvement of academics, rather than private consultants, is outlined by Christa Clapp, research director of Norway’s climate science institute Cicero. She explains:
“We need to rethink how climate scenarios are produced and what information they offer, to make them more useful for investors. If we don’t have academics in this space we will never really know how good the quality of data are because it is all in silos designed by private consultants.”
While still at an early phase of development, the trend of applying academic methodologies to assessing sustainability criteria provides hope that investors will be able to make increasingly informed decisions when investing online in accordance with their personal values and ethics.