Sustainable investment: the difficult realities of adjusting to maturity

If 2006 was the year sustainable investment was “born” as a serious participant in the investment industry, 2022 was the year it turned 16 and was confronted with the difficult realities of adjusting to maturity.

As a marker of that growth, the UN Principles for Responsible Investment was launched in 2006 and had 77 signatories by the end of that year. By the end of 2022, it had over 5,000 signatories controlling over $120 trillion of assets, and comprising the large majority of the global asset management industry.

Sustainable investment has become more complicated over the last 12 months. The invasion of Ukraine prompted market rotations that led to underperformance by most ESG-focused funds.

Political divides in the US gave rise to an “anti ESG” backlash against the finance industry’s growing focus on sustainability, which in turn led to its own backlash against efforts to disconnect investment from the social and environmental challenges shaping social and political agendas.

Those tensions come against a backdrop of an intensifying regulatory agenda, which is quickly becoming more complex, demanding and global.

Amid that complexity, it would be easy to just focus on meeting the requirements imposed on us, fine-tuning narratives or bending investment principles. We haven’t.

Sustainable investing runs through our firm’s strategy. Social and environmental trends are shaping economies, industries and financial markets and as active managers, our priority is navigating the risks and opportunities those trends create, connecting the capital we manage for our clients to forces that will shape investment returns.

We are not alone in believing that the business and investment landscape is changing. That shift is underlined by the changing shape of the most important threats global executives identify in the WEF Global Risks report. All of the five biggest long term concerns are grounded in social or environmental trends this year, whereas until a decade ago they barely featured.

That picture of change underlines our conviction that the forces that have driven business success and outperformance in the past will not be the same as those which define future leadership.

Our path to navigating the changing world and the impacts of growing social and environmental pressures lies in both the analysis we apply to investment decisions and the influence we can bring to the investments we have made.

We have invested heavily in developing insights into social and environmental trends, bringing together specialist sustainability capabilities with the insights of hundreds of analysts and fund managers around the world to develop proprietary research, models and tools to help inform investment decisions.

In 2022, we also recognised the efforts our investment teams make to engage with the management teams of investee companies by introducing a standard that analysts and fund managers in most fundamental teams undertake a minimum of three in-depth engagements annually covering the areas described in our Engagement Blueprint.

Ultimately, the investment industry’s role is to deliver returns by stewarding our clients’ capital as effectively as we can, and to provide ways for them to connect their capital to the areas of structural need which will create opportunities for value and growth by providing solutions to those challenges.

Our growing focus on private assets reflects our belief that new ways to connect capital to economic and social need will create value in the future, and that our clients will seek those opportunities.

The group-wide impact framework we have developed is designed to bring rigour to strategies that connect investment to real world changes, recognised in our membership of the Operating Principles for Impact Management.

We have developed a range of sustainability-focused investment products across the group in recent years and will continue to do so throughout 2023 and beyond.

We are driven by the goal of helping our clients navigate the challenges they face, and there are few bigger challenges than those posed by social and environmental pressures.

In our Annual Sustainability Report 2022, we describe the work we are doing in some key areas of our business to prepare for the uncertain world we are heading towards together.

Read Schroders’ Annual Sustainability Report 2022 here