Lately, looking at 2022, conditions have admittedly not favoured green companies with a growth bias, given the rocketing oil prices and the move in many countries to remilitarise and rearm. On the other hand, sustainability is a goal that has reached the top of governments’ medium- and long-term agendas in recent years, with economic policies and budgets aimed at achieving the UN’s Sustainable Development Goals, climate targets and biodiversity restoration programmes.
And what has brought the importance of sustainability to policy-makers’ attention has been the baggage accumulated from unrestricted extraction of easily accessible and abundant fossil fuels – which had taken millions of years to form – to feed the voracious appetite of our accelerating technological progress. The resulting expansion of world trade resulted in a sharp fall in extreme poverty along with a marked improvement in living standards in the West, and more recently also in emerging countries. But, as we know, the problem is that the level of consumption of some resources has far outstripped their ability to regenerate, not to mention the many other ramifications for our environment, such as biodiversity loss and biochemical pollution.
The consequences of the environmental and social imbalances this way of life has caused are only just starting to show and are set to grow exponentially in the longer run, which is why urgent action is needed to lead the world onto a new, more sustainable path.
Preparing for these long-term effects of a short-term model will require hundreds of billions of dollars’ worth of investment, and governments cannot bear that cost alone – they will need the help of private financing. And this is where the crucial role of wealth management comes in.
Private banks can make a strong contribution by directing clients’ assets towards the companies that are leading this transition, thereby helping fund them. This will require a fair assessment of all the fundamentals of an investment – the overall and sector-specific risks, the company’s potential for becoming a future leader, and also the longer-term environmental and societal impact of its activities.
Does this mean that a sustainable investment strategy can only be “buy & hold”? No, quite the contrary. Just like in traditional investing, managers must also meet their clients’ short-term financial performance expectations, and that calls for making regular trades in portfolios. The difference is that sustainable investment managers have an additional set of data to analyse: they must appraise a company not just on the usual financial figures, but also on its progress in the transition towards a sustainable economy – a complex and, as yet, ill-defined field.
Not only that, they have to be able to assess how committed the company is to that transition; and that cannot be ascertained with a dogmatic approach of excluding an entire sector, it must be based on a pragmatic study of facts. For example, they must take into account technological developments, how industrial processes are evolving, and the level of control over supply chains, in which a lot of the globalised economy’s environmental and societal risks are concentrated (especially when it comes to the many extraction and manufacturing businesses located in countries where ESG legislation is scant).
Sooner or later, the companies that equivocate on the transition or fail to adapt will struggle to secure financing. They will come under increasing pressure from regulators and will likely see their stakeholders, including their clients, move on to greener pastures.
So wealth management and sustainable finance share genes, their purposes and goals are closely connected: to pass on wealth – whether financial, environmental or social – to the next generations, to build them a firm base for their future prosperity.
Let’s hazard a guess that quite soon investors will demand as much impact as financial reporting so that they can take informed action towards sustainability, restoring meaning to their investments and extending their time horizon.
Robert de Guigné