We are all looking for the next big thing and a variety of sectors and investment opportunities are revolutionising the fiscal landscape. The first in our series that looks at financial trends in the new economy sets its sights on Environmental, Social and Governance investment and looks at where it is headed and its eventual viability.
Here and Now #1: ESG
As the world changes, so too does business and investment. In a recent report from BNP Paribas who spoke to over 1,000 high-net-worth individuals across 19 different countries to discover their investment interests, the response was enlightening. Climate change action registered as the most important sustainable investment goal, with a third of respondents placing it as their number one concern, while decent work and economic growth, and affordable, clean energy came a close second and third.
It’s a trend moving in tandem with greater sums of money going into social and environmental initiatives. Environmental, Social and Governance (ESG) is one of the fastest growing investment sectors. ESG criteria is a set of standards within a company’s operations that allow socially-conscious investors judge and screen a potential investment.
Over the past two years, the market for sustainable investment has grown by 34 per cent to $30.7 trillion. More than three quarters of business owners in Europe, Asia and the US say that they already have exposure to or would be interested in having greater involvement in sustainable investments. And, with younger entrepreneurs showing the greatest concern for sustainable issues, it’s a shift we can expect to accelerate.
But just what is the best way to have an impact with your business? Ultimately, that’s a question with a different answer for every businessperson. An investment with safe returns and consistent social and environmental gains might appeal to one, while a financially risky pay-out on a project with greater impact could spark another’s interest – or perhaps even straightforwardly philanthropic investment makes the most sense.
If climate action is the top concern for entrepreneurs, then financial institutions will have to work harder to furnish them with the relevant products and services. At present, even though investors are keen on sustainable and impact investment, they are equally unsure of its viability and return on risk. And that’s before factoring in variations by territory.
Globally, 33 per cent of entrepreneurs choose climate action as a top five UNSDG. This issue is important to every generation, with Baby Boomers (42 per cent) more likely to feel this than Millennials (37 per cent). Climate change action is the priority in Europe; in the US, access to affordable clean energy; in Asia, promoting inclusive growth.
The long run
22% of those who have sustainable investments evaluate them as a “very risky” part of their portfolio. 58% believe sustainable investments require the long-term sacrifice of returns. These investor concerns deserve to be taken seriously and addressed head on.
Improving the visibility of ESG will be key to attracting potential investors in Europe, particularly in Italy, the UK, Belgium and Spain. However, in the US, entrepreneurs are not yet sure these investments are mainstream. 43 per cent would like access to more ESG investment options and more information in relation to these opportunities.
Brazil and ESG
Brazil is in an enviable position to become a global leader in sustainable finance. The country still has a long way to go but according to the Brazilian Association of Financial and Capital Market Entities (Anbima) there was BRL 700 million invested in 167 ESG funds in Brazil last year. And Otávio Damaso, head of regulation at Brazil’s Central bank, claims that green investment in Brazil could reach as much as USD 1.3 trillion by 2030. This is a sector Next Auditores is very much keeping an eye on.