Investors’ main objective is profit maximisation. But, increasingly, they also expect their investment to have a beneficial impact on the environment. There is no greater return on investment than a healthy planet. 

To document this, investments in Environmental, Social, and Governance (ESG) registered an increase of 15 per cent during the first half of 2019, after growing just one per cent through 2018. Despite being a relatively small fraction compared to the total money market sector, the expansion is staggering as investors are now exploring more ESG options.

Millennial investors are speaking with their wallets and have an active interest in the social and environmental decisions their money funds on both a governmental and corporate level. ESG investing is now moving into the mainstream and developing from negative screening of sinful industries to more quantitative, data-driven and index approaches as the availability and quality of ESG metrics and reporting have increased.

Geographically, Europe was at the forefront of ESG investing and regulations, while the US caught up by greater transparency and disclosure and adopted more quantitative and commercial approaches that prioritise ESG without sacrificing returns. As expected, emerging markets lag, even though socially responsible investing arguably was born in several emerging markets via official lending conditions.

There is no greater return on investment than a healthy planet

Green bonds and microfinance have served as the most accessible gateways to these kinds of investments in the past. Ultimately, the objective of ESG is to broaden corporate behaviour beyond narrow profit maximisation. In response to greater reporting, transparency and disclosure, as well as the growth in ESG flows, companies have indeed improved their ESG efforts.

More of a concrete impact is seen as companies continue to reduce carbon print and water usage while improving governance and gender equality. The green movement, in particular, is creating new business opportunities in alternative energy, electric cars and batteries.

Until now the environmental pillar of ESG has received the most attention, but focus is increasingly shifting to Social and Governance, in particular Gender Balance at the investable company, i.e. the vision that men and women should be treated equally in social, economic and all other aspects of society, and to not be discriminated against on the basis of their gender. European regulations and investor pressure are inducing more companies to disclose gender pay metrics and to improve gender balance at company boards. Companies with better gender balance have produced better returns on equity, thus incentivise investors to promote this.

Going forward, shrewd investors should look at a variety of factors as companies are much more than just accounting. What was once a vague idea to take environmental, social and governance factors into consideration when investing, has turned to be an important characteristic. Almost half the mutual funds that scored a high or above average on Morningstar’s sustainability metric beat the market in 2018, superior to all actively managed funds.

Clifton Caruana is a qualified certified financial analyst and a Portfolio Manager at Bank of Valletta Wealth Management.

This article is not, and nothing in it should be construed as an offer, invitation or recommendation in respect of investment products or services offered by the BOV Group.  Value of investments may go down as well as up and may be affected by changes in currency exchange rates. Past performance is not a guide to future performance.