What do investors want? ESG research. When do they need it? Yesterday

We have just 12 years to get climate change under control, the UN announced in October, so we had better get investing. 

But unfortunately it is becoming clearer that investing in UN sustainable development goals (SDG)-aligned countries, companies and products is far more complicated than first believed. It is also becoming clear that financial institutions with strong environmental, social and corporate governance (ESG) criteria-focused research will be coveted by investors as they seek to figure out how to apply the $22 trillion in assets committed to responsible investing in an effective way. 

Just where do you invest if you are looking to keep your investments ESG compatible, for example?

ESG v GDP

My favourite piece of recent research is Renaissance Capital’s October strategy report that shows ESG scores versus GDP of countries over time. The five countries that achieved the highest ESG scores according to its research are Denmark, Sweden, New Zealand, Switzerland and Norway. 

As the authors point out, it pays to invest in these countries if you are looking for a pure ESG play, but also if your ESG goal is to invest in mostly white, rich, Christian-heritage countries.

“If you want to invest to produce an improvement in ESG scores, it is clear to us that there is far more to be gained in emerging markets and frontier markets (FM) than developed markets,” says the report’s author. “It is EM and FM that need the investments which through higher per capita GDP bring greater gender equality, a better legal system, adult literacy and higher life expectancy.” 

The challenge is that, like developed markets, while social and governance indicators may improve in emerging markets with industrialization, the environmental impact does not. As countries become richer, they emit greater levels of pollution, complicating investment scenarios for ESG investors. 

Other findings of the research offer some sobering insights. The best developed markets and emerging markets in 2018 measured by equity activity and sovereign bond pricing have the worst ESG scores, for example. Not only that, but many developed markets are actually seeing their ESG scores fall – including those stellar performers like Sweden and Norway, as well as the US, Canada, the Netherlands, Singapore and Australia.  

Personally, I think given the increasing amount of bad news coming out on climate change forecasts, hemp might be a good investment right now 

In a recent survey of large institutional investors such as BlackRock and UBS Asset Management, Natixis also found that geography is crucial for SDG-related investments; that investing where there are gaps will be more effective than investing in those regions already aligned with SDGs – even if the latter may earn your product a pretty SDG sticker. 

Orith Azoulay, who became global head of green and sustainable finance last year for Natixis, was originally in research herself and has created an internal R&D unit dedicated to finding the information so desperately needed to help investors navigate the increasingly complex world of the SDGs. 

While ‘greenwashing’ is so well-known as to be on everyone’s radar and is even being addressed by the European Commission, Natixis’ report speaks to the threat of ‘SDG-washing’. The report offers a framework for investors on how to approach investing in countries and companies to ensure that their investments aren’t supporting one goal at the expense of another. 

Another European bank in the sustainable finance sector that goes heavy on research, ING, is joining the fray. It announced it would be steering its €500 billion loan book towards meeting the Paris Agreement’s two-degree goal, and to do so it would be using something called a Terra approach. 

The idea is that companies are going to need new technology to adapt to an environment of lower carbon emissions. ING gathers data from science-based agencies and independent organizations to track by sector what technologies are going to be needed and what company investment plans are. That data then can guide part of the loan book. 

And the icing on the cake for ING’s Terra approach is that it is open source in the hope that it will encourage other banks to help speed up the move towards carbon reduction. 

Take note

Drilling down into specifics, there are a couple of sectors that investors should be taking note of, according to other bank research. UBS’s October CIO report highlights electric cars and car-sharing, estimating that by 2025 around 25% of new vehicles sold globally will be electrified. 

“Supportive regulation, falling costs, and technical innovation should see the broader electric, autonomous and car-sharing market grow around 10-fold to $400 billion,” the authors say. 

Morgan Stanley points to the inevitable growth in bioplastics in its latest sustainable research.

Personally, I think given the increasing amount of bad news coming out on climate change forecasts, hemp might be a good investment right now. 

Cannabidiol – derived from hemp – is flying off shelves as a natural and legal antidote to anxiety (Rolling Stone magazine recently reported the market could hit $22 billion by 2022). Hemp is also a resource-light crop that keeps the air clean and apparently also improves tainted water and soil. Or is that just greenwashing? We’ll need more research on that.