For several decades, investors have focused on short-term financial gains that were not necessarily aimed at what would provide the best outcome for the environment or society going into the future. It represented a pure shareholder perspective, where short-term profits were the leading investor principle.
But now, we realize that this way no sustainable profits are generated and short-term objectives are not in line with all stakeholder’s best interests. On the contrary, it damages the interests of most stakeholders and, most of all, the world itself.
The shift to sustainable, long-term orientated investing, is well on its way and is being accelerated by the new, global language of the Sustainable Development Goals (SDGs). Sustainable investing and SDG capital expenditure requires longer-term investments in initiatives that benefit multiple stakeholders. Growth-market private equity opportunities directed by the SDGs are longer-term investments, creating sustained value compared to catering to shareholders’ requests for immediate payouts.
In the last couple of years, we have seen tremendous growth in impact, ethical and sustainable investing. The value of the global impact investing sector in 2018 was estimated at $114 billion and this is estimated to increase by 2020 to a potential value of $1 trillion. Sustainable investing doesn’t have a lower return potential. A study by Harvard Business School concluded that a dollar invested 20 years ago would now have grown to $28.36, instead of $14.46.
With this growth also comes the acknowledgment that sustainable investing has a business case and that it is as profitable, possibly even more so than non-sustainable investment. Funds and bonds that outperform non-sustainable investing products prove this claim, so the term “shared value investing” is being used more and more often.
Shared value investing means that creating multiple values, on both financial and societal return for multiple stakeholders, does not damage profits but secures them. So, it is fine to focus on societal and financial return at the same time, as a means to identify outperforming companies and investment products. Sustainable companies often show better operational performance with a positive effect on stock performance. Of course, from an investment focus it is crucial to also bear in mind the finances the company works with and performs. Shared value investing focuses on a win-win situation and since the amount of companies integrating environmental, social and corporate governance (ESG) is growing so much, there is more than enough volume in the market to do so.
But not only the investment sector itself grows. The implementation of ESG factors in mainstream investments and funds are being implemented more and more and get integrated into financial analysis, ESG research, and measurement. The net inflows of ESG strategies worldwide accounted for $78 billion in 2018, and a recent KPMG report predicted that ESG ETFs will grow another $400 billion over the next decade. ESG criteria are by their very nature shared value criteria. When examining an investment for its ESG values, an investor is, in fact, assessing the impact of the investment or company on the environment and people. Used with nearly half of sustainable investments, this technique is now taking off with visible returns.
Today, more than 80% of S&P companies report on ESG factors compared with one in five in 2011. Recent studies show a clear contribution of ESG to financial performance. Deutsche Bank’s asset and wealth management division concluded that ESG made a positive contribution in 62.6% of the meta-studies and a negative only in 10% of the cases. So, the demand for ESG services is growing tremendously.
So, the market for shared value investing grows tremendously. In the next decade, we’ll witness an even stronger, exponential growth of shared value investing and all its related products and services. And it makes sense since, in accounting terms, the high sustainability firms outperformed the low sustainability firms as measured by growth in value of equity and return on assets. It is now the fastest-growing sector of the investment sector.
It is clearly the future. And the next generation, the millennials, will accelerate this shift even more. Over eight out of ten millennials are actively interested in sustainability and mind their behavior both as consumers and employees. It is also the future we should want. We are a stakeholder in the bigger picture. And that picture and our global goals need us to invest in a sustainable way, with a shared value perspective, for it to be sustainable in the end.