VWV Volumes #7: Associate Casey Shay '23 on The Future of Sustainable Investing

The Future of Investing

Sustainable investing (or ESG investing) has previously been viewed as a trade-off, sacrificing returns to generate a positive societal impact. Rather than purely looking for financial gain, an investor must now consider the company’s environmental or social impact as well, further narrowing a pool of potential investments. Luckily, for both investors and for the benefit of society, this is not the case. 

ESG investing has become increasingly profitable with the rapid growth of sustainable consumption trends. The year 2020 emphasized the importance of ESG investing, as droughts, wildfires, and peaceful protests against racial inequity demonstrated the need for change. As people learn more about the environmental and social climate around them, they tend to adjust their consumption habits toward companies that help the society they live in. This growing concern of sustainability in consumers minds is reflected in the market as well. The MSCI KLD 400 Social Index, a weighted index of 400 US securities with high ESG ratings, outperformed the S&P 500 by 5% in 2020. Additionally, these markets have performed similarly over the past 10 years, both having an annualized growth rate of around 13%. Morgan Stanley also released a paper on sustainable investing, and came to the conclusion that the return on ESG funds is comparable to that of traditional funds as well as stating that ESG funds may be more stable in times of market volatility. 

ESG in Venture Capital

Despite sustainable investing proving itself in the public markets, ESG has proven to be a problem for some startups. There are many challenges that come with building a company from scratch, and ensuring the company has high ESG ratings may not be the top priority. But, the more consumers change their decisions, the more profitable sustainable investing becomes, the more popular ESG startups will be.

Firms like SustainVC and Social Impact Capital that focus on early-stage sustainable investing are attempting to capitalize on this market trend. Both firms invest similarly in companies that combat climate change, push for social equality, strive for better healthcare, or improve education. Some interesting companies in their portfolios include Edovo, a company that provides inmates with education through tablet technology, and Prometheus Fuels, a company working on producing zero-carbon fuel for commercial vehicles. Despite being only 14 years old, SustainVC boasts 200 million in revenue annually, in addition to supporting companies that collectively reduce CO2 by 141 million pounds annually, support 2.7 million low-income users benefitting from financial services, and a host of other benefits. 

Future Outlook of Sustainable Investing

While sustainable investing has had a meteoric rise the past decade, is there any evidence to suggest that it has any growth potential? Looking at the immediate future, the Biden administration may greatly benefit ESG companies. The Biden administration has been preaching extremely aggressive climate change reform, in addition to other promises of education reform and social justice. This could take the form of government subsidies to clean energy companies, heavier taxes on heavy polluting companies, or simply calls to the people to change their consumption habits. Now, the feasibility of such reform is unknown, but it is very likely that sustainability will be heavily pushed during this presidency and at the front of the minds of many Americans. While there is no certainty of the future, sustainable trends and therefore sustainable investing do have great promise. The climate crisis will be a constant battle for years to come, social inequity cannot be solved in a matter of years, and sustainability is driven by the younger generation. This is reflected in a survey conducted of 242 financial advisers from The Journal of Financial Planning, where nearly 29% of advisers indicated they plan to increase their use or recommendation of ESG funds over the next 12 months.

Closing Remarks:

Perhaps it is just the optimist in me, but personally, I believe that sustainable investing is here to stay. I think that the trends we are seeing today will become staples of our generation and lead to more sustainable investing and future benefits as a society. ESG investing, sustainable investing, impact investing, whatever you want to call it, is the investing of the future.