Small actions add up: what's in stock for the future of sustainability?

On October 31st, as I'm sure we're all aware, the 2021 United Nations Climate Change Conference (otherwise known as COP26) began. With four days left to go until the end of the conference, like probably many of you, I've been trying to stay up-to-date with all of the decisions and agreements that our world leaders have reached. It made me pause and I've found myself taking a step back and really taking stock of what the future might hold for sustainability.

In this issue of Money's Impact, I want to look at sustainable investing with much broader strokes. To help me out with this huge topic, I had the pleasure of speaking with a wonderful colleague and sustainability expert, Rachel Whittaker.

What does the current landscape look like?

To return to COP26, it would make no sense for me to talk about the future of sustainability without at least mentioning some of the decisions that have been made over the last week. To recap some of the recent announcements:

• Japan's Prime Minister, Fumio Kishida, promised up to $10 billion in additional climate finance for developing countries
• 100+ countries signed a Global Methane Pledge, which agreed to reduce methane pollution by 30% by 2030
• The Glasgow Financial Alliance for Net Zero revealed its' $130 trillion pledge to convert the global economy to clean energy

Many predictions and estimations have been made about what we 'need' to come out of COP26. An extremely interesting article by New Statesman noted that 'the summit must lay out tangible actions to tackle the climate crisis', and has divided these into four 'wishes':

1. Set the conditions for sustainable policies and frameworks
2. An increased focus on the policies and financial investment needed to bring homes and businesses to net-zero
3. Focus on practical explanations of what needs to be done and how to do it
4. Improve diversity of thinking towards the issues of climate change

With four days left to go until the end of this conference, I wonder what else will be decided upon. If you're reading this post-COP26, leave a comment about any decisions or announcements you were excited (or even surprised) to hear about.

How can we think about the future of sustainability?

When I think about the future of sustainable investing, the United Nations' Sustainable Development Goals are typically one of the first baselines to come to mind. Set up in 2015 as part of the 2030 Agenda of Sustainable Development, the progress that we have made on these 17 goals helps to provide us with benchmarks on what the next decade might look like.

The world has made some good progress in some of these goals - for example, there are 'encouraging signs that energy is becoming more sustainable and widely available' (Goal #7). However, the general consensus is that not enough progress has been made. For goals such as Good Health and Wellbeing (Goal #3), or for Quality Education (Goal #4), progress was halted by Covid-19, but for others, there was not a huge amount of improvement even before the pandemic.

When I was researching the progress made on Goal #15 (Life on Land), for example, the 2019 Global Assessment Report on Biodiversity and Ecosystem Service found that around 1 million animal and plant species are threatened with extinction (many within decades).

The SDGs are definitely ambitious, and there is no denying that to achieve all 17 goals by 2030 is a big task for the entire planet. However, they are still achievable - and in fact, many of them influence one another, meaning that if we make enough progress in one area of sustainability, we might be fortunate enough to see a snowball effect begin.

That these 17 goals are all so closely interlinked with one another means that they remain a great way to think about the future of sustainable investing, because they highlight what many economists and experts have been saying for years: sustainability needs to be a group effort.

What can we expect to see in the future?

Besides the SDGs, we can expect to see greater capital flow into sustainable investments in the future, something the last 12 months have already shown to be true. The transition from Q4 of 2020 to Q1 of 2021 saw 169 new sustainable funds launched, and total assets rose by 19% to nearly $2 trillion, according to Morningstar. As this continues, we can also expect that in many ways, investments will become 'more sustainable' than ever.

How is this possible? The short answer is because ESG benchmarking is on the rise. We are seeing more companies and organisations pay attention to their sustainability ratings, and as the industry becomes more transparent, there are fewer places for unsustainable practices to hide. Over the next few years, these standards will become a new normal for us all, making it easier to invest sustainably, but also to follow up with your investments, and make sure you know exactly where your money went, and what it went towards.

Just look at this chart from Climate Action, where they compared the performance of companies in the Utilities and Consumer Goods industries.

In both industries, the companies which had begun to transition into more sustainable and renewable practices saw increased ranking on the FTSE TPI Climate Index, while those that did nothing, saw a sizeable decrease.

What do the experts say?

To help me envision what the future of sustainable investing might look like, I had the pleasure of speaking with a colleague who is an expert in the topic, Rachel Whittaker.

When we talk about the future of sustainable investing, is there a specific image that comes to mind?

'I would like to think that eventually, all investing is sustainable. The concept of companies and investors considering the environmental and social impacts of their products and operations, and making decisions that make sense for humanity as well as individual profit, should be a normal part of doing business. I don't think that's an idealistic vision.

At the moment, we as a society still allow individual interest to outweigh collective interests in our economies, which is ultimately unsustainable. Things are starting to change, driven by social norms and an awareness of the damage we are doing to the planet, as well as regulation, but we still have a long way to go.'

What makes you feel optimistic about the future of this industry?

'I think there is a generational shift in how people think about the purpose of industry and economics. Today's young people are much more globally connected and socially aware than, for example, I was 20 years ago. When I see the bright young people who want to come into this industry, I'm reassured and inspired that they are not only more ambitious in terms of what sustainable investing should achieve, but they are motivated and a lot smarter than I am too.'

What should investors start doing today to secure this future?

'To drive change, investors need to use their influence, and take investment decisions aligned with the future they want to see. For example, if you want to support a transition to a low (or net zero) carbon economy, invest in the companies that are driving that transition and try to phase out the problematic companies.'

"Large investors can engage with companies, but even small and individual investors can spread the word. Small actions add up" - Rachel Whittaker

In a nutshell...

I think it's important to take a step back every so often, and to look at the bigger picture of our sustainability efforts. By acknowledging the role that the SDGs - or even COP26 - will have on our investments, we are able to better prepare our finances for the opportunities that may arise, and to protect them from any accidents.

As Rachel says, 'integrating ESG information to make better investment decisions is pretty much a given these days, but we need to beyond thinking about just what the impact of ESG trends will have on our investments and think about the impact our investments have on ESG issues'.

What can you do next?

1. Look into new routes for sustainable investments: if you've been testing the waters up until now, this is your sign that sustainable investing is a powerful tool that is only going to become more important over the coming decade, so you should at the least be reading up on how the industry works
2. Learn more about the FTSE TPI Climate Transition Index, and how you can use it to ensure that the companies you currently invest in are keeping their sustainability promises
3. Rachel's tip is to ask your advisor or even the fund managers what it all means. 'It can sometimes be hard to look past the marketing material to really understand the sustainable philosophy', she commented, 'and that is why all investors should not be afraid to ask questions and challenge their financial advisors and fund managers'.

What would help you the most to invest more sustainable? Let me know in the comments below!

• Article: New Statesman, 'What COP26 needs to deliver for a sustainable future'
• Podcast: Intelligence Squared, 'Everything you need to know about COP26'
• Report: CFA Institute, 'Future of Sustainability in Investment Management: From ideas to reality'