The fund industry’s wake-up call: how investors want us to act
The fund industry’s wake-up call: how investors want us to act
Like Greta Thunberg crossing the Atlantic, sustainability has gone global.
But the future of our planet doesn’t just dominate news and social media, it is part of our conversations at home, around the water cooler and in the coffee shop. Every flight we take, every meal we order, every item of clothing we buy can tug at our conscience.
For companies, sustainability is no longer a “nice to have”, it’s an imperative. That’s if they want to thrive, attract talent, and relate to customers. Ultimately it’s essential to staying profitable in the long term.
So has this tectonic shift moved beyond the reusable coffee cup or ubiquitous water bottle to individuals’ finances? When we sought the answers, the results were more conclusive than we could have imagined. They are a call to action for the entire investment industry.
A global and widespread phenomenon
In the Schroders Global Investor Study, we spoke to 25,000 people with more than €10,000 to invest, from 32 locations around the world. It was one of the largest surveys we’ve carried out, and across all countries and generations the message was clear. Investors care about sustainability more than ever.
A huge 60% will consider sustainability factors when investing. Two thirds believe their investment choices can make a real difference towards building a more sustainable future.
Perhaps most remarkably, concern isn’t concentrated among the younger generation. In fact, it is Generation X – now in their forties and early fifties – who are most likely to be concerned about their investments’ sustainability.
In the responses to one of the questions, we found 61% of Gen X will always consider sustainability factors when selecting an investment product, compared with 59% of millennials. Perhaps the parents of Thunberg’s generation are absorbing her message, concerned for the future of their own children.
Most importantly, these Gen X investors are squarely in the phase of their lives when they are meant to be accumulating savings. For them to worry about how their portfolios will affect the planet suggests a real shift in attitude – possibly a tipping point for us all.
But how do they want us, the investment industry, to act on their behalf?
We asked investors to rank the United Nation’s four Sustainable Development goals. Their priorities, by importance, are planet, prosperity, people and peace. The message seems clear - they want fund managers to act on the environment, including the pressing issue of climate change.
There’s a growing awareness of how investors want to become sustainable investors. The old world of screening stocks – building a portfolio that leaves out “sin stocks” – is the least popular choice with only 21% of investors favouring it. Investors now prefer more proactive approaches: investing in companies because they are best-in-class on environmental or social issues (40%); or investing in companies that are ahead of the curve in preparing for such changes and are therefore likely to be more profitable (39%).
This shift in attitudes to different investment approaches is important and is, perhaps, underpinned by a growing awareness that sustainability doesn’t mean sacrificing profitability. In fact, quite the opposite.
Historically, those who expressed an interest in sustainable investing were asked: “What don’t you want to invest in?” The result was a fund built from the leftovers, rather than looking for companies that were attractive because they were sustainable.
As a Gen X-er myself, I want my investments to build a more sustainable world. I want rigour and analysis to identify the best companies. I also realise that my investments exist in a pretty imperfect world, and that unless we are focused on encouraging all companies to be more sustainable we won’t get very far. To achieve this, we need a new conversation about the true meaning of sustainability. The industry must ensure we have it.
How can the industry help?
The response to our survey indicated that investors believe the whole financial industry could do far more to help them invest sustainably. They are looking for practical steps, such as lobbying for regulatory change to encourage sustainable investing, and working towards a set of easy-to-understand sustainability ratings from a trusted independent body.
Respondents also want better information on sustainability from financial advisers, and for investment managers to use their own in-house ratings to reassure customers that the funds they choose actually are sustainable. Well over half (57%) believed that such ratings would encourage them to invest in line with their values.
In it for the long term
How are we reacting to this demand from investors? One example is our SustainEx tool, which can quantify the social and environmental impacts of each company. It gives us visibility on all of a company’s activities, both positive and negative. This means we can construct portfolios knowing that the companies within them are fit for the long term.
Instead of focusing on a single issue, SustainEx allows us to understand wide-ranging issues from sugar taxes, to water shortages to the impact of online gambling.
The same tool allows us to engage with businesses whose practices are unsustainable, because the investment risks are quantified in dollars. As active managers, we can hold companies to account, ensuring they adapt and improve.
Ultimately, I hope SustainEx will help make every one of our portfolios sustainable.
A sustainability revolution
We are on the brink of a sustainability revolution as significant to the global economy as the arrival of the internet. Without the right conversations now, we risk repeating exactly the same mistakes of the dotcom boom and bust. This isn’t just about replacing your coffee cup today, but realising if the world is to progress it needs to clamp down on a range of unsustainable behaviours. All of our investments will be impacted as a result.
Over the next 20 years, sustainability risks will affect every part of the value chain and every sector of industry, just as the internet has changed every part of our lives.
Finding winners and losers will not just be about picking a few wind turbine firms, just as it wasn’t about picking a few dotcom start-ups in the mid-1990s.
Equally, the biggest fallout from the internet boom was felt by incumbent businesses, who failed to wake up to the revolution.
So long-term success will mean looking at how existing businesses deal with the risks confronting us, and choosing those that are moving towards a sustainable approach in everything they do.
Investors take sustainability seriously. The asset management industry must live up to their expectations. Whether from a financial or environmental perspective, we can no longer afford to operate in a vacuum.
This is a wake-up call.
- Read more about how sustainability seeks to deliver long-term value in a fast-changing world.
Schroders commissioned Research Plus Ltd to conduct an independent online survey of 25,743 investors in 32 locations throughout the world, with fieldwork held between 4th April – 7th May 2019.
This research defines ‘investors’ as those who will be investing at least €10,000 (or the equivalent) in the next 12 months and who have made changes to their investments within the last 10 years; these individuals represent the views of investors in each country included in the survey.
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