Millennials, who are characterized as values-driven, environmentally conscious and also financially savvy, are driving the growth of sustainable investing and changing the investment landscape. According to The Global Sustainable Investment Alliance (GSIA), global sustainable investing assets under management reached USD 30.7 trillion over the past 2 years, an estimated 34% increase.
Firms should shift strategies in incorporating the desires of the wealthy millennials who are known as socially responsible investors. The industry seems to move from a passive investor population to a self-funding one. Millennials will demand more active involvement in their own investments, wishing to be more actively involved in controlling their prospects.
Sustainable Investing and Its Benefits
Sustainable investing is defined as the process of investing in sustainable companies or funds, some people call this ESG (Environmental, Social and Governance) investing. It is a socially responsible, ethical, impact and principles-based investing. Those who invest sustainably prefer to invest in companies, organizations or funds with the purpose of generating measurable environmental and social impact besides a financial return. Impacts are spread across various sectors, including renewable energy and climate change, health, safety, and community development.
Sustainable investing enables individuals to select investments based on personal priorities and values. Providing sustainable investing opportunities also enables firms to not only secure financial returns for clients but also to carry out intrinsic returns not replicated elsewhere. These intrinsic returns lead to rooted connections between the clients and their investing habits which create long-term customer demand.
THE GSIA definitions of sustainable investment have emerged as a global standard of classification which comprises these strategies: negative/exclusionary screening, positive/best-in-class screening, norms-based screening, ESG integration, sustainability-themed investing, impact/community investing, as well as corporate engagement and shareholder action.
The largest sustainable investment strategy globally continues to be negative or exclusionary screening, with a combined USD 19.8 trillion in assets under management. This is followed by ESG integration, which has grown by 69% over the past two years, to USD 17.5 trillion in assets. Negative screening is the largest strategy in Europe, while ESG integration commands the majority of assets in the United States, Canada, Australia, and New Zealand. Meanwhile, corporate engagement and shareholder action constitute the predominant strategy in Japan.
Growth of Global Sustainable Investing Assets
Sustainable investment assets continue to climb globally, with some regions demonstrating stronger growth than others within their local currencies. GSIA recorded that growth has been exceptionally strong in Japan, where sustainably managed assets grew over 300 percent and the United States, where sustainable investing assets have mounted 38% since 2016 to nearly USD 12 trillion in 2018.
The Proportion of Sustainable Investing to Total Managed Assets (2014-2018)
The proportion of sustainable investing relative to total managed assets grew in almost every region, and in Canada and Australia/New Zealand responsible investing assets now make up the majority of total assets under professional management.
The exemption to this trend in Europe, where sustainable investing assets have declined relative to total managed assets since 2014. In terms of where sustainable and responsible investing assets are domiciled globally, Europe continues to manage the highest proportion, with nearly half (48.8%) of global sustainable investing assets in 2018. However, this is a decline from 2016 when Europe managed nearly 53% of sustainable investing assets.
Sustainable investments now extend across the range of asset classes commonly found in diversified investment portfolios, which shows the asset class allocation reported in Europe, the United States, Japan, and Canada in 2018. Collectively in these regions, a majority of assets were allocated to public equities (51%) at the start of 2018, followed by fixed income (36%).
In 2018, real estate/property and private equity/venture capital each held% of global sustainable investing assets. Sustainable investments can also be found in other assets such as hedge funds, cash or depository vehicles, commodities and infrastructure, accounting for 7% allocation.