Carbon neutral real estate, fair trade chocolate and child-labour-free fashion. We are becoming increasingly discerning as a society and demanding sustainable alternatives. This trend also plays a role in the choices we make regarding investment. The idea is gaining traction that sustainable investment is a serious alternative to traditional investment portfolios. Financial returns still play a major role in rating investment performance, but the impact on people and the planet is equally prioritised. But what exactly constitutes sustainable investing, and what makes it so important?
Investing in sustainable companies is a positive financial affirmation of the good steps they have taken.
Solange Rouschop Sustainability Manager ABN AMRO Retail & Private Banking
Socially responsible investing for eight billion people
The United Nations have estimated that by the year 2030, the global population will have passed the eight billion mark. The extra mouths to feed and homes to be built will put serious additional strain on our environment; production of food and other goods causes CO2 emissions and uses up finite natural resources. In addition, current supply chains still present social issues such as poor working conditions. The ecological impact of our actions may one day literally drown us. If we want to tackle tomorrow's problems, we should adjust our behaviour accordingly today. That also applies to the way we invest.
Sustainable investing, what exactly is that?
When investing sustainably, a bank looks beyond the expected financial returns versus the risks. Special attention is paid to the ESG (environmental, social and governance) impact of a company or product. Ultimately, each invested euro has a direct or indirect impact on people and the planet. For example, a sustainable investment fund will not invest in companies that are involved in the violation of human rights.
By giving companies, funds and other investment products a rating, banks can provide insight into the sustainability of an investment. That rating is commonly based on ESG criteria. If an organisation has crystal-clear sustainable policies and actually walks the talk, a bank can decide to qualify that company as a sustainable investment.
Making choices means exercising influence
By consciously choosing where to invest, you indirectly influence the activities of the targeted organisations. Banks can facilitate this choice for private individuals by carefully screening companies on the basis of their behaviour, and deciding whether they should be included in their investment universe. If a company is structurally involved in polluting or unethical practices, banks can choose not to recommend them to clients and to exclude them from managed investment portfolios.
This principle also applies in reverse: companies and products can be added to portfolios due to their positive performance. If clients want to make sustainable investments, on their own or through a mandate, they can opt for companies and funds that uphold their responsibility towards people and the planet, for instance by writing and upholding a clear policy about ESG aspects. Take DSM, a company where innovation never stops and that sells products like second-generation biofuels to help customers reduce their ecological footprint. Another example is Heineken, which sustainably manages its water use in beer production. Investing in companies like this is a positive financial affirmation of the good steps they have taken.
Return on sustainable investments
From a financial perspective, a sustainable investment is not necessarily less profitable than a traditional one. So even if returns are your primary focus, there is no real reason to abstain from investing sustainably. Indeed, especially the careful decisions made by companies with a long-term focus could actually be an indicator of success. Good management makes for a healthy company, while also reducing the odds of incidents that could lead to loss of reputation and financial damage. One only has to cast a cursory glance at BP’s share price history after of the Gulf of Mexico oil spill to see these principles in action.
Sustainable companies are the future
Compared to traditional companies, sustainable ones are much better prepared for the future. This is reflected in the investment returns that these companies generate, and in the responsible way they treat the world. By choosing sustainability, they contribute to solutions for problems that involve everyone on the planet. Our conviction is that it is up to investors themselves whether or not to invest sustainably. But in our view a responsible choice need never conflict with a financially sound decision. ABN AMRO offers many opportunities for this type of investment. Sustainable investing - why wouldn't you?
Why not go for 100% sustainable investing?
Friends and acquaintances sometimes ask me why we as a bank do not focus on investing 100% sustainably. That is a sensible question, and I always give two reasons. First, ABN AMRO has a large and diverse clientele. A percentage of those clients wants to invest 100% sustainably, and one of the ways in which we cater to them is to offer products developed by our joint venture Triodos MeesPierson. Other clients, however, invest in a much wider range of products, which we accommodate as well. Secondly, we are convinced that thanks to our size, we have considerable influence when we engage in a dialogue with companies about sustainability. Excluding these companies would mean taking away our opportunity to positively influence them, and that would be a shame. As powerful as the revolutionary tool of exclusion can be, the evolutionary approach of improvement could provide huge pay-off in the long term.
ABN AMRO makes sustainability accessible to a wide audience
In 2015, ABN AMRO's Sustainability Indicator has been expanded with new criteria including 'sustainable policy'. On a five-point scale, the indicator rates how companies handle various ESG aspects. We make this assessment based on independent information from Sustainalytics combined with our own evaluation of a company’s policy and possible controversy. We make visuals of these sustainable ratings, to help our clients make sustainable choices more easily – even when they invest in traditional equity. Which goes to show that sustainable investing is a theme all across the board at ABN AMRO. We facilitate every approach to sustainable investing, ranging from a confident dive to carefully testing the waters.
Sustainable investing will eventually be mainstream
Sustainable investments are on the rise, noticeably so. Both online and through investment advisors, sustainable investment products are increasingly being brought to the attention of prospective investors – our clients included. Several deliberate choices are coming together here. Companies take a good hard look at the impact of their policies, banks carefully consider which range of investments they offer, and clients decide where their money does (or does not) end up being invested.
The financial world has a tangible opportunity to contribute to solutions for social and ecological issues that concern us all. One day, sustainable investing will be considered mainstream. Many contributing factors will define when that day comes; I will be elaborating on this topic in another post. As a sector, we are absolutely carrying our weight. We have to be realistic and accept that change requires time and energy, but the results are worth the efforts. I hope that, in the near future, we will be asking ourselves: Sustainable investing - what were we waiting for?