ESG isn’t just a ‘nice to have’
By Charlotte Seward (pictured), private banker at Investec – As anyone working in financial services will know, ESG is here to stay, and this is certainly clear from speaking with my clients in the private equity space.
Working in private banking, it’s crucial I understand my clients’ needs inside out. This doesn’t just mean their financial needs, however dynamic they may be, but also having an intimate understanding of the values that drive their decisions.
Over the past year, thanks to the pandemic, we’ve seen a global refocus of these values, with many of us reassessing what’s important in our lives and how we can live more sustainably.
For businesses, this focus on sustainability was already growing in importance prior to the pandemic. According to data from Morningstar, 2019 saw sustainable funds that invested based on ESG-related themes reach inflows of USD20.6 billion. Now, as consumers become increasingly conscious of how their actions impact the planet, businesses are responding - creating more sustainable products, and investing in emerging markets and sustainable funds. Biodegradable packaging from businesses like Notpla, and Everrati, which installs sustainable electric engines into classical cars, are just two examples of recent note.
But while ESG is a growing focus for businesses, my clients are increasingly looking at how sustainability can be reflected in their investment choices, and how they can align their capital requirements with these values.
As sustainability increasingly becomes a part of our everyday lives, I think it’s important to understand how it impacts our clients’ lives too. This means reviewing how financial products can cater to their sustainable demands, while also helping to drive purposeful change.
An era driven by sustainability
We’re witnessing significant changes in consumer behaviour as a result of shifting values and greater awareness of environmental and social needs. Moreover, we’ve seen a number of factors contributing to ESG as a key area of growth, but much of it can be attributed to new environmentally-friendly alternatives to traditional industries, utilities and products. This is particularly the case in instances where conventional approaches to business are being challenged - from how cars are built, to how energy is created, and food supplied.
Take the growth trends driven by plant-based diets and eco-conscious consumption, for example. According to SPINS, oat milk sales have increased by 293.7 percent in the natural enhanced retailer channel and by 345.2percent at conventional retailers. Further data from Euromonitor also sees the global plant-based meat industry set to be worth USD23.2 billion by 2024, spurred by concerns ranging from animal welfare to food security and the Covid-19 pandemic. Indeed, 75percent of people around the world say they plan to eat and drink healthier because of the pandemic, with more people also looking towards reducing food waste, food and drink packaging, growing food at home and focusing on seasonal and local consumption.
Utility markets are also seeing rapid change, as consumers are drawn to greener energy alternatives. This has seen the carbon ratio of energy consumption in the UK halving since the turn of the millennium, dropping to just 33 percent overall. Energy suppliers such as Bulb have helped to catalyse this movement, achieving a market share of 5percent in just five years. This is no mean feat in a space dominated by enormous incumbent businesses, and emphasises the increased importance of sustainability as customers increasingly look for businesses to have sustainable credentials.
Alternative markets in the food and drink or utilities sectors did not see anything like the demand we have now a decade ago - or even five years ago. Covid-19 and the powerlessness consumers are feeling around climate change are accelerating such changes - and many other trends - even further. The fact is the pandemic has highlighted systemic fissures in society, with lockdowns forcing people en masse to consider what they want ‘the new normal’ to look like. Sector trends, like in the food and drink industry, are just one indicator of how new priorities will be woven into the next phase of capitalism.
Driving sustainable investment
As consumer purchasing habits have shifted to seek more sustainable products and services, it's no surprise that our clients’ investment priorities are changing as they recognise the growing value of ESG focused businesses, and growing focuses on risks such as climate change and social inequality.
This trend has seen PwC forecast that assets in sustainable investment products in Europe will reach EUR7.6 trillion over the next five years, outnumbering conventional funds. According to Calastone, the disruption caused by Covid-19 has similarly accelerated this growth as investors look for sustainable business models that can withstand market shocks.
Other high-profile investments from the likes of footballer Chris Smalling in companies like This (a vegan meat alternative) and Ananas Anam (a vegan leather business) are also not only helping to drive awareness and interest amongst savvy consumers, but drawing the attention of keen-eyed investors.
With further Morningstar data towards the end of 2020 showing that sustainable investment funds surpassed USD1 trillion for the first time on record, it's becoming evident just how important ESG is for investors today.
Creating sustainable financial products
Taking ESG seriously, from both a moral and financial point of view, will mean building it into your deals. To give an example, this year Investec provided a EUR600m ESG linked facility to Investindustrial; this was structured to offer reduced interest payments when specific ESG goals were met, reinforcing incentives in areas like the environment, gender diversity and governance. Cost savings are in turn ring-fenced by Investindustrial for investments in carbon reduction initiatives, creating a virtuous cycle of re-investment and ensuring that all stakeholders benefit from the arrangement.
Investec has monitored this sector closely for a long time, producing our first sustainability report in 2002. In our latest 2020 report we also detailed our commitment to the UN’s Sustainable Development Goals, and how we achieved carbon neutral status in all our direct operations in the 2018/19 financial year. I’m excited to see that sustainability is no longer just a yardstick, but a factor that is leading the approach of many funds and investor decisions.
While it’s not rocket science to say we need to take ESG seriously as an industry, I believe there’s lots to be done to change the way we approach it. Creating uniquely structured deals and ensuring we’re offering clients options that reflect their values is a great start, but with trends changing faster than ever it’s key we don’t get comfortable with our approach. We, as an industry need to instigate change in financial services, not just accommodate it.