by Krish W, Madhav B, Mahi M, Manan P, and Sujal Gupta
Summary. Sustainable investing trends for the next decade emphasize the integration of environmental, social, and governance (ESG) factors into investment strategies. Important elements include ESG bonds and thematic investment, which concentrates on industries like sustainable agriculture and renewable energy. Investments are more in line with values and risk-adjusted returns are improved by ESG integration. A critical talent shortage in sustainability skills underscores the need for robust training programs. In general, sustainable investing seeks to balance financial benefits and positive impacts on the environment and society.
Introduction
The year is 2024, and global change is sweeping the world. The threat posed by climate change is no longer hypothetical; rather, it is a genuine threat drawing near. With record-breaking floods and catastrophic wildfires, there is an immediate need for action.
However, among the difficulties, a growing optimism emerges. Nowhere is the power of one's decisions being recognized by businesses, governments, and individuals more than in the realm of sustainable investing. For this emerging movement, 2024 is set to be a turning point. It's not just about feeling good; it's also about directing resources toward answers, encouraging creativity, and creating a future in which sustainability and wealth coexist.
Today we’ll learn not just about the Sustainable trends, but also what affects these trends and the requirement of jobs in this field.
What is Thematic Investing?
Thematic investing represents a forward-looking investment strategy designed to leverage anticipated developments in technology, societal trends, and economic shifts. Unlike traditional investment approaches, thematic investing empowers investors to customize their portfolios to align with their future convictions, transcending conventional boundaries. At the heart of thematic investing lies a commitment to sustainability. This entails investing in businesses and technologies expected to thrive while contributing to a sustainable future, alongside the pursuit of financial gains. Notably, industries poised to benefit from the global transition to a greener economy, such as sustainable agriculture, electric vehicles, and renewable energy, are prominently featured within thematic investment themes.
A key characteristic of thematic investing is its emphasis on megatrends—significant, transformative forces capable of reshaping the global economy. These megatrends encompass shifts in population demographics, advancements in technology, and environmental challenges. By investing in themes associated with these megatrends, investors position themselves to potentially outperform the overall market. Thematic investing also facilitates outcome-focused investments, enabling investors to target specific objectives such as social impact, environmental benefits and sustainable practices. This alignment of investment decisions with moral principles and aspirations for positive change underscores the socially conscious nature of thematic investing.
In summary, Thematic investing can make investing a responsible and enriching experience for the investor. Thematic investing is a socially conscious investment approach that not only seeks financial gains but also aims to make positive contributions to the environment and society and promote sustainable trends. By looking ahead and aligning investments with future trends and convictions, thematic investing contributes to the advancement of a more sustainable global economy.
Understanding ESG bonds
An ESG bond is a type of debt security. In the case of debt security, the issuer owes the holder money and must make interest and principal payments by the set maturity date. Both traditional and ESG bonds can be issued by corporations, municipalities, and governments to raise funds. One key contrast with ESG bonds is that they are issued in support of businesses or projects that demonstrate strong environmental, social, and governance concerns. By 2025, the issuance of sustainable bonds could reach over USD 4.5 trillion annually (source: Institute of International Finance, Pictet Asset Management).
ESG bonds fall into several common categories:
Green bonds: They raise money for renewable or clean energy, clean transportation, buildings, wastewater management, and other sustainable climate adaptations. Green bonds are the most common ESG asset class. ICMA has issued voluntary green bond principles for compliance.
Social bonds: They raise money for food security, sustainable food systems, socioeconomic opportunities, affordable housing and infrastructure, and access to essential services. ICMA also has social bond principles and guidelines for voluntary compliance.
Climate bonds: They are similar to green bonds, but they raise money for investments that will reduce greenhouse gas emissions or reduce dependence on carbon-intensive sources of energy.
Sustainability bonds: They are issued to raise funds for a combination of green and social projects. Some green or social bonds are reissued as sustainability bonds.
Sustainability-linked bonds (SLBs): They require issuers to make specific commitments on ESG objectives. Although they sound similar to sustainability bonds, they have unique governance principles. If a stated ESG target is not achieved by an SLB, issuers have to pay a penalty in a coupon step-up.
Pros and cons of ESG bonds
Pros
Higher ratings: Standard & Poor’s and Moody’s may rate ESG bonds higher than bonds with similar risk profiles. This is because ESG issuers tend to be more transparent than non-ESG counterparts.
Lower risk: ESG bonds are some of the most stable investment options, balancing any investment portfolio. A study published by the Jönköping International Business School in Sweden found that even with lower interest rates, ESG bonds are attractive to private and institutional investors because of their lower risk.
Stable returns: ESG bonds share similar advantages with traditional bonds in terms of interest and repayment terms. Bonds can also be bought or sold at any time, making them a liquid asset.
Impact investing: ESG bonds allow investors to choose bonds that work toward their personal ESG priorities and require accountability to ensure funds are spent on environmental, social, or governance objectives.
Cons
No reporting standards: While companies may voluntarily report according to International Capital Market Association (ICMA) standards or offer third-party compliance reporting, there is no standard set of principles set out by the U.S. Securities and Exchange Commission.
Lower interest rates: Jönköping also found green bonds yield an average of 15 to 20 basis points lower than comparable conventional bonds.
Price fluctuations: Because bonds can be bought and sold at any time, their price changes with market fluctuations.
A wide range of financial products with a sustainability theme are emerging, and the avenues for making socially conscious investments are rapidly expanding due to the growing interest in sustainability. ESG bonds are appealing to both institutional and private investors since they frequently have lower interest rates along with better overall stability. Because they are less volatile than conventional bonds, ESG bonds make a captivating complement to a well-balanced portfolio.
According to Bloomberg, by 2025, the proportion of global assets under management managed by ESG will surpass one-third. ESG bonds are among the greatest options for impact investors to finance important concerns in governmental, corporate, and community contexts.
Source: Bloomberg
ESG Integration in Businesses and ESG Accounting
As a growing number of investors look to align their investments with their sustainability objectives, we are seeing an increased adoption of ESG integration into portfolios. Increased demand for strategies that incorporate environmental, social and governance (ESG) factors into their investment process is being driven by more investors wanting to align their investments with their values, along with the potential for better risk-adjusted performance. With the world becoming more climate aware and investors striving to connect the dots to a more sustainable future, investment thinking has now changed.
ESG integration is a way in which ESG information is incorporated into investment decisions and analysis to help enhance risk-adjusted returns. This is regardless of whether a strategy has a sustainable focus. More importantly, it allows investment managers to understand the complexities of global megatrends.
Factors that are taken into consideration for ESG integration-
Environmental: Climate change and carbon emissions, Air and water pollution, Biodiversity, deforestation, energy efficiency, waste management, water scarcity.
Social: Customer satisfaction, data protection and privacy, gender and diversity, employee engagement, community relations, human rights, and labour standards.
Governance: Board composition, audit committee structure, bribery and corruption, executive compensation, lobbying, political contributions, whistle-blower schemes
ESG Accounting
The conventional emphasis of profit-loss statements is shifted towards sustainability, which includes social responsibility, the environment, and good governance, with the introduction of ESG accounting. Three distinct elements demonstrate the significance of ESG.
On the one hand, considering ESG issues helps a business remain sustainable over the long run and provides valuable information about its non-financial performance, which is important for risk management and making decisions.
In 2017, the Morgan Stanley Institute for Sustainable Investing conducted a poll which revealed that 75% of all investors and 86% of Millennial investors desired to invest in companies that would provide positive returns on their investments. The individual investor's portfolio is driven by ESG, and younger investors are increasingly asking for details on the ESG performance of the companies they invest in.
According to the Deloitte 2023 Global Marketing Trends report, sustainability has evolved from being "a hot-button issue" to a practice that is advantageous for businesses as well as morally right. Brands become strong and relevant when they satisfy the demands of the market, governments, and regulatory agencies.
The idea of environmental, social, and governance (ESG) accounting has grown in popularity as companies realize the significance of these elements. The application of ESG principles to financial reporting procedures is known as ESG accounting. By taking into account a company's operations' social, environmental, and governance dimensions, it surpasses conventional financial measures.
Source: 2023 Deloitte Global Marketing Trends executive survey, conducted in June 2022
The Sustainability Talent Shortage
In recent years, there has been a sharp rise in the need for sustainability skills and experts in environmental, social, and governance (ESG) matters. From 2021 to 2022, the number of sustainability-focused hires in the finance industry grew by 17%, with the highest growth seen in skills related to carbon accounting and carbon emissions in the United States and European Union.
At the same time, a critical shortage of qualified talent in this area is emerging. In 2022, only 39% of asset management firms and a mere 23% of asset owners reported being able to find suitable individuals to meet their needs for sustainable investing. Without proper training programs at universities and professional development opportunities, employers may continue to face a skills gap in meeting the demands for sustainability.
It is expected that collaboration between academic institutions and the private sector can help close this gap by producing graduates with the necessary skills to succeed in sustainable finance. Recruitment pipelines from universities with robust sustainability programs could become a key advantage in attracting top talent.
Jessica Alsford, Chief Sustainability Officer and CEO of the Institute for Sustainable Investing at Morgan Stanley stated, "Over the last two years, the Morgan Stanley Global Sustainability Office has doubled its headcount to meet the growing demand for sustainability expertise. It's crucial that a new generation of leaders can help create and support scalable sustainable finance solutions.
Source: JP Morgan
Conclusion
In conclusion, over the next ten years, sustainable investing has the potential to change the financial environment completely. Investors can attain financial gains and positively benefit society by incorporating environmental, social, and governance (ESG) concerns and adopting themed investment. Notwithstanding obstacles like reduced interest rates and the requirement for consistent reporting, ESG bonds provide stability and accountability. Meeting the increasing demand for sustainability will require addressing the talent deficit. Ultimately, sustainable investing supports a future where economic growth and environmental stewardship go hand in hand.
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