Governments and organizations all across the globe have been pushing towards sustainable process development. This has, in effect, led to investors seeking to align their portfolios with similar values while pursuing lucrative returns on their investments. The alternative investment space, predominantly the real estate and infrastructure space has seen a lot of bustle around this. In addition to that, the private equity players, HNIs, and VC firms have also revised their expectations for most companies, now assessing them for their carbon footprint, and sustainable growth initiatives as well. These investors might, at times, stay aloof of companies that have a very high carbon footprint and need to make significant conscious efforts towards net carbon neutrality.
The surge in the importance of sustainable investing techniques, ESG compliance in asset and investment management domains, and the likelihood of their growth and rise in the future can be attributed to many reasons. However, some key reasons for the same are explored below-
If we look into the various avenues that have evolved in the past few years as an amalgamation of sustainable investing and alternative asset space, a few avenues that tend to stand out are:-
Timberland Investments: Investing in sustainably maintained forests has recently started to become an increasingly popular trend and this is because it has several benefits associated with it. Timberlands can provide consistent profits, the opportunity for capital appreciation, and portfolio diversity. They also play an important role in environmental sustainability by absorbing CO2 and increasing biodiversity which can also account for the CSR activity commitments by conglomerates.
Infrastructure Funds: Sustainable infrastructure funds invest in projects that improve our communities and support a low-carbon future. These can include renewable energy projects, energy efficiency upgrades, sustainable transportation systems, and water treatment facilities.
Digital Assets involved in the Sustainable Development space: There are some digital assets (coins/tokens) that have recently come about with the ever-increasing traction of sustainable investment strategies. Some of these blockchain-based assets are-
Carbon Credits: These digital tokens represent verified emission offsets, allowing companies and individuals to compensate for their carbon footprint. Several platforms are working on blockchain-based carbon credit solutions.
As per the data furnished in a report by the Morgan Stanley Institute for Sustainable Investing, over 75% of investors globally are interested in this space from an investment viewpoint, with around 57% stating that their interest increased in the last couple of years. Additionally, around 54% said that they aim to increase their sustainable investments in the next year.
While the response seems overwhelmingly favorable, with around 70% of investors stating that effective compliance with ESG and sustainability reporting standards would translate into great financial returns, it is not all roses, as some investors have raised their concerns about the greenwashing risks and lack of transparency in the processes.
A report by Bloomberg Media delved into the details about the factors that are impacting the considerations for ESG metrics in investments. As per the report, factors like accountability for social development, scope for risk reduction, growth in goodwill & reputation and some other positive externalities are driving the prospects of greater returns in this investment space. On the contrary, there were concerns about lack of set standards in the costs associated with it, tightening of regulatory constraints, lack of available avenues etc which led to people being apprehensive with direct integration of ESG metrics and measures in investment analysis.
Based upon the motivation/barrier study around factors affecting the ESG considerations, there has also been a study revealing data about proportion of investors who have shown their interest or aversion to this space across regions. Globally, 54% investors have shown interest in increasing the proportion of sustainable investments in their portfolio. Out of these, 82% are very interested in sustainable investing as a growing investment avenue and another 11% while interested in increasing the proportion of such investments in their portfolio are not very keen on sustainable investing and the prospects it offers. 26% respondents from the global total are looking to decrease their holding of such investments from which 39% are very interested in sustainable investing but are probably not convinced with the developments that have happened so far and another 12% are not interested in this space at all.
Amongst the popular segments where the investors are willing to disburse their funds, climate action initiatives, healthcare enhancement, water solutions and development of circular economy with respect to manufacturing process (plastic positivity, carbon neutrality initiatives etc) take half the share of the top themes. Investors predominantly have shown their preference to initiatives that address pressing concerns amongst ESG metrics and factors. The report by Morgan Stanley Institute for Sustainable Investing shows the same which implies that companies and projects that have their focus on one of these themes have better prospects of sustained and effective growth in future. Real estate projects could also benefit greatly from this information as impactful integration of these elements would contribute to making the projects more appealing and ESG metric- friendly.
A report by the Global Sustainable Investment Alliance (GSIA) shows that in 2023, Global Sustainable Investment AUM reached $38.2 trillion. Europe remains the leader with over $18 trillion, likely due to its established ESG reporting frameworks. As per a report by Bloomberg Media, ESG investing is set to reach $50 trillion in total global AUM, which would mean over 1/3rd of total AUM globally (~ $141 trillion). The momentum that ESG investments have got is such that around 70% of business leaders across the boards believe that eventually, ESG considerations will come about to be the key factor for making investment decisions.
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