The non-financial value of responsible investment has historically been a major driver but in the current climate is the “feel good factor” of socially and environmentally conscious investing enough to attract investors who may feel that their capital would earn a better return elsewhere?
Dr Fabiola Schneider, assistant professor in accountancy at University College Dublin, believes there is a “warm glow” effect that comes with deciding to invest responsibly.
“Investors can feel good about contributing to positive outcomes like decarbonisation, improved health or increased access to water,” she says. “For example, faith-based investors have long aligned investments with their values by excluding sectors like alcohol or gambling.”
The research backs this up, she says: “Multiple studies show that there are investors willing to forgo returns in order for investments to align with their values or to have a certain impact.”
But according to Carolina Angarita-Cala, head of sustainability with Cantor Fitzgerald, the term “non-financial value” with respect to responsible investment is something of a misnomer and is ready to be retired.
“I think we need to examine the notion of non-financial value in responsible investment and whether it is accurate to continue using this term,” she says. “In the past, responsible investment was driven mainly by the values of the investor, rather than the potential financial returns. However, over time, a demonstrable link has developed between responsible investing and financial performance, and value creation.”
Angarita-Cala points out that four out of the top five global risks ranked by severity by the World Economic Forum are environmental risks.
“So, while addressing environmental concerns may be considered ‘non-financial value’, in fact these are actual financial risks to companies, supply chains, and investments,” she says.
She notes that a core focus for companies right now is to increase their understanding of nature-related risks and opportunities that may be relevant to their economic activities. “Although current geopolitical challenges may continue to delay necessary government policies to support companies in this endeavour, voluntary implementation of international frameworks is providing crucial capacity-building opportunities,” she says.
Angarita-Cala also warns that the current reluctance of companies to make public commitments on sustainability should not be confused with inaction. “The economic opportunity has already been identified so the focus is now on execution.”
Angarita-Cala points out that while current valuation models fail to reflect nature’s true economic value, there is growing concern that nature-based assets are due a repricing that will impact all sectors of the economy.
“As a result, more companies are investing resources into this area, whilst driving standardisation in sustainability reporting in response to regulation and investor demand,” she explains. “ESG [environmental, social governance] investing is evolving, from a tick-box exercise to data-driven accountability, where sustainability is embedded into core business functions.”
Responsible investment is a broad term, Schneider notes. “It does not necessarily result in lower returns because ESG approaches can also enhance financial performance. For example, managing the risks related to physical impacts of climate change may result in better risk-adjusted returns. Investing in future solutions can provide steep growth.”
This doesn’t mean that responsible investing will always be the automatic choice, however. “There will also always be people happy to provide capital to harmful activities if it provides a return, such as firms involved in fossil fuel expansion or human rights violations,” Schneider says. “This is where we need regulation to level the playing field – a carbon tax such as the EU ETS [European Union Emissions Trading System] makes fossil fuels a less attractive investment, irrespective of values.
“Another example is the [EU] Corporate Sustainability Due Diligence Directive, which aims to ensure due diligence alongside the supply chain of a firm.”
In addition, Angarita-Cala notes that regulation on sustainable finance has emphasised the role of financial services providers in helping meet the client’s own financial and sustainability objectives.
“This is no longer a process instigated by the client; the financial services provider now has the responsibility to initiate this conversation and help the client understand whether responsible investment is a priority for them.”
There will always be those investors focused solely on return, she adds. “However, for those open to a more nuanced approach that seeks to maximise returns while reducing social and environmental risks, both the market and regulators are making it easier to meet those demands.”
