ESG, SRI, or ‘Impact Investing’ are all terms that have become much more popular in financial circles in the past few years. A decade ago, the average investor would not have given much thought about a company’s environmental impact or social when deciding whether to invest in company A v company B. By far more weight was put into the bottom line – gauging the potential return achievable based on financial metrics alone.

But a growing number of people, particularly the younger generation and millennials, are becoming much more aware of the positive or negative impacts companies may have on the world economy. Do such considerations need to come at the cost of better performance? Not really. In fact, several recent studies show the contrary.

ESG investing gives importance to a company’s Environmental, Social and Governance practices, while considering other traditional financial measures. Environmental considerations include pollution or climate change; social factors include human rights or health and safety; whereas governance practices relate to quality of management, board independence and conflicts of interest, among others.

Socially Responsible Investing (SRI) entails the removal or selection of specific investments based on certain ethical guidelines. SRI investing goes a step further than ESG by selecting a company over another based on the underlying motive, which could be religion, personal values, or political beliefs. For instance, screening companies to avoid the gambling or tobacco industries or selecting and giving preference to companies contributing to charitable causes.

Similarly, impact investing prioritises companies whose main objective is to accomplish goals that benefit the greater good of society, not the company’s bottom line – such as companies specifically dedicated to find innovative clean energy, better education, improved healthcare or affordable housing.

Looking at these three categories or criteria-based investing as ‘sustainable investing’, there have been massive amount of inflows over the past few years. Studies by Morningstar, a data provider firm, show that in 2019 a record €120 billion were injected in sustainable investment products, compared to just under €50bn net inflows in 2018. By the end of 2019, assets under management exceeded €660 billion across over 2,400 funds surveyed by Morningstar. This was a 56 per cent increase over the previous year, albeit buoy­ed by a positive 2019 performance in financial markets.

Climate change has been a big catalyst in driving the popularity of sustainable investing. In fact, this has substantially fuelled demand for ESG ratings. Since taking the helm at the European Central Bank, Christine Lagarde had vowed to put climate change on the ECB’s agenda.

Up to a few years ago, hardly any central banker made any reference to the warming climate when making their assessments of the economy. Today, over 60 central bankers and reg­ulators have joined forces with the sole purpose of focussing on the financial consequences of global warming – the Network for Greening the Financial System (NGFS), of which both the Central Bank of Malta and the Malta Financial Services Authority are members.

Studies to date not only defy critiques that sustainable consideration to portfolio management hamper returns, but rather, data analysed by Morningstar suggests that the majority of sustainable-based invest­ments out­performed non-ESG funds over one-, three-, five- and 10-year periods.

Last week, Amazon announced its intension to launch a $2 billion fund to invest in climate technologies. So one might ask whether the next ‘sustainable’ move by a listed company has been made because of true underlying ethical considerations or just to attain a higher ESG score and avoid being left out from theme-based tracker funds or actively-managed funds. The truth of the matter is that sustainable or ESG factors are not just good to have, but moving forward are important to consider to achieve outperformance.

However, when analysing performance, one also needs to understand the discrepancy in performance or outperformance based on the funds’ underlying asset classes. Outperformance seems to have been more robust across large-capitalised based funds, as opposed to a less rosy picture across the euro-corporate debt front strategies.

To conclude, while one should not scrap traditional forms of investing, such thematic investments can be used more than ever before to complement one’s portfolio. The direction markets and the broader economy are heading clearly shows that the trend is set where all stakeholders will surely keep sustainability and ESG considerations high on the agenda in years to come.

This article was prepared by Colin Vella, CFA, head of Wealth Management at Jesmond Mizzi Financial Advisors Ltd. The article does not intend to give investment advice and its contents should not be construed as such. The company is licensed to conduct investment services by the MFSA and is a member of the Malta Stock Exchange and of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in the article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Ltd of 67, Level 3, South Street, Valletta, on Tel. 2122 4410, or e-mail colin.vella@jesmondmizzi.com

www.jesmondmizzi.com

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