Over the last five years or so, social and environmental risks and opportunities (together with corporate governance) have emerged from a long incubation on the fringes of the mainstream investment industry to become commonplace long-term investment themes in the world’s capital markets.
For example, according to the US Social Investment Forum, roughly 11 per cent of assets under professional management in the US are now involved in socially responsible investment. Eurosif estimates that socially responsible investment assets represent over 17 per cent of the asset management industry in Europe. Over 170 pension funds and other asset owners – with combined assets under management of around US$18 trillion - have now signed the UN Principles for Responsible Investment. The pace of change and innovation in the sustainable investment field is particularly noticeable in emerging economies such as Brazil, India, China and South Africa.
A key driver behind these trends is the growing political and economic prominence of climate change, together with market-based incentives for the transition to a lower-carbon future. Labour standards, human rights, product safety, human capital and poverty reduction are also major issues.
The basic hypothesis behind these powerful trends in sustainable investment is that environmental, social and governance (ESG) factors in an economy, sector or company play an increasingly important part in creating or eroding shareholder value. Beyond this business case rationale, many investors and stakeholders also argue a compelling case for treating sustainable development as a straightforward matter of good corporate citizenship and enlightened self-interest.
Participants in the broad sustainable investment market include pension funds and other institutional investors; hedge funds; retail investors; and high net worth individuals and family offices, together with a wide range of advisors, intermediaries, asset managers and other links in the value-chain. In simple terms, their routes into the sustainable investment market can be divided into three main categories:
- “Socially responsible” or “ethical” investment funds that use corporate social responsibility (CSR) as a positive or negative filter in portfolio construction. This is sometimes combined with shareholder activism.
- “Green” investment strategies specialising in companies that provide solutions to sustainable development problems e.g. clean technology, renewable energy, environmental services, healthcare.
- “Mainstream” integration of non-traditional financial factors (including ESG factors) into financial analysis, portfolio construction and share ownership. This is often combined with shareholder engagement.
At the same time, sustainable investment is slowly but surely rising up the agenda of other stakeholders who play a key role in shaping the investment climate: legislators, policy-makers, regulators, multilateral agencies, and the professional bodies that set accounting and auditing standards.
All of this translates into some important strategic and commercial questions for exchanges:
- How can an exchange help ensure that the market efficiently meets the new ESG-related information needs of investors, analysts and companies?
- Can ESG issues contribute to the badge of quality, integrity and transparency conferred on companies by listing on the exchange and to the overall profile of individual markets?
- Can the exchange help to raise corporate awareness and management practices among listed companies?
- Can the exchange add value by introducing investors and issuers to one another on theme of sustainability excellence?
- Can the exchange create new listing and trading products geared to specific sustainable investment niches?
- How can exchanges help to shape the way that regulatory conditions and reforms facilitate ESG transparency and sustainable investment flows?
The relevance of these questions to individual exchanges - and the decisions they take - clearly depends on each exchange’s specific business characteristics. In general, however, the sustainable investment strategies currently in evidence among WFE’s 51 members fall into three broad categories:
- Raising ESG awareness and standards among listed companies;
- Information products and services for sustainable investors; and
- Specialised markets for specific sustainable investment niches.
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