The future of sustainable investing is in the balance. It involves balancing financial and extra-financial considerations, balancing the short term and long term to ensure that short-term goals do not compromise long-term goals, and balancing stakeholder interests and seeking fair outcomes for all.None of this is easy. But sustainable investing is critical to the sustainability of investing.Although the future of sustainable investing includes many unknowns, three important tenets where sustainable investing goes further than its forerunners:
It is additive to investment theory and does not mean a rejection of foundational concepts.
It develops deeper insights about how value will be created going forward using environmental, social, and governance (ESG) considerations.
It considers many stakeholders.
In many ways, the financial industry is moving from sustainable investing as a good idea to a reality that has implications for all investment portfolios. There is a growing recognition that some ESG factors are economically material, especially in the long term, and it is, therefore, important to integrate material ESG factors in investment decisions.
The future of sustainability in investment management report (
Download the full report (PDF), has
consider a 5- to 10-year time horizon, with input from 7000+ industry stakeholders including 23 virtual roundtables, structure follows the acronym “IDEA”:
- Influences: The accelerating demand for sustainable investing and scenarios for the future
- Drivers: How investment organizations are adapting and expanding their business models and investment models to meet investor expectations for sustainable investing
- Enablers: How the operating models and people models of investment organizations will facilitate growth in sustainable investing
- Actions: A rubric for investment organizations, investment professionals, and the industry to support the pathway of sustainable investing
Sustainable investing is accelerating in demand, and several key trends are emerging. After many years of foundational efforts to standardize and enable ESG investing, ,markets are now entering a true mainstreaming phase of ESG investing. Furthermore, the COVID-19 pandemic has focused investors on the vulnerability and resilience of the financial system and intensified the discussions around sustainability. It has revealed the need for systemic thinking and shown the personal consequences of our interconnectedness. The financial importance and materiality of social factors have become evident, where previously many social factors had been seen as externalities outside of consideration of the investment portfolio.
Sustainable Investing Trends
CFA Institute introduced four main scenarios for the future in Future State of the Investment Profession, and all carry implications for sustainable investing.
Fintech Disruption
Fintech can create particular value for sustainable investing, especially through the retrieval and evaluation of alternative and soft data. Greater data availability allows investors to have more customized sustainability objectives, uncover new investment opportunities, and better measure impact.
Parallel Worlds
The growing inclination of consumers to express their preferences in all their purchases naturally extends into personalization related to sustainable investing. We may also see more populist movements attempt to mobilize change in environmental and social areas by exercising influence on finance and business.
Lower for Longer
Low investment returns could make it challenging for underfunded pension plans to increase their commitment to ESG investing if there is an expectation or even a perception that there is a return trade-off. Private assets in renewable energy, energy efficiency, and resource scarcity, however, may benefit from the search for alpha.
Purposeful Capitalism
This scenario calls on investment organizations to become more proactive in helping solve the world's problems, while remaining grounded in materiality. There is a growing emphasis on total system-wide returns on capital, regulators increase their focus on sustainability and impact, and asset owner collaboration and influence grow.
Climate Energy
Carbon pricing regimes emerge, supported by national regulatory frameworks to deliver transparency, liquidity, and ease of access. Investment organizations account for carbon prices, and the quality of climate risk management becomes a differentiator. Climate views are increasingly incorporated into wealth management, retail, and defined contribution contexts, following the lead of institutional investors. Investment professionals deepen their understanding of climate risk resilience and mitigation.
Social Status
Innovations occur in transparency and reporting as social factors become better defined and measured. There is a greater ability to compare organizations on previously hidden areas of operation. Social media is increasingly influential in highlighting good and bad examples of company behaviors. Alternative data sources add further information to enable assessments to be made on the softer aspects of corporate conduct.