Investing money with a conscience in bull markets is not an ethical privilege.


Stuart Paterson’s By

Sustainable investing has emerged as a beacon of steady returns and capital inflows in a very volatile year for investment markets, and the positive results have helped debunk some of the misconceptions previously associated with this type of investment.

In the past, investors looking to invest in compliance with their values or beliefs have concentrated on techniques such as ethical investment, which uses negative screening to eliminate certain industries and businesses that are considered detrimental to the environment or society, such as armaments and gambling.

Cynics have long argued that one must sacrifice some amount of financial return in return for investing in accordance with one’s values or conscience, or that ethical investing is merely a bull market privilege that does not hold up in periods of market turmoil.

However, the 2020 events have clearly shown that this is not the case, as the socially responsible stock indices have outperformed the traditional stock indices substantially. The MSCI World Socially Responsible Net Total Return Index was up 16.6 percent on a yearly basis through Dec. 22, compared to the normal MSCI All Country Net Total Return Index, which was up 13.3 percent.

The outlook is still unclear, but the mortgage market has signs of optimism.

This performance has contributed to an increase in demand for sustainable strategies for investment. In February and early March, also during the Covid 19 market correction, investment inflows into these strategies remained high and accelerated subsequently. Investors have discovered that financial benefits can still be made and investments are consistent with their personal values.

Data has shown that higher environmental, social and governance (ESG) scores tend to be less prone to bankruptcy and profit declines, as greater caution about ESG risks will shield them from scandal and boost innovation and productivity.

At the other end of the continuum, German carmaker Volkswagen, which had the lowest government ranking, charged penalties in excess of $30 billion and saw its share price collapse after the diesel emissions scandal.

As the appetite of investors has grown, so has the number of available investment opportunities. Over the past five years, green bond issuance worldwide has risen annually, and by the end of September 2020, the total market capitalization of the global green bond market was over EUR 650 billion.

A tumultuous year is coming to an end when it becomes apparent that Covid will not have a fast fix.

When it was revealed that the 750 billion euro NextGenerationEU stimulus package, Covid-19, will be 30 percent sponsored by green bonds, the sector got another piece of good news. A clear example of impact investment is the use of green bonds, where bond funds are used solely for new and existing projects that have a significant environmental impact.

We assume that by reminding us how fragile our economies can be to unfamiliar shocks, the Covid 19 crisis has increased demand for sustainable investment. And while problems such as global warming are at the forefront of the minds of investors and consumers, other areas are just as important.

The Covid 19 pandemic illustrated the vital importance of biodiversity and social values and highlighted how prejudice and injustice are addressed by corporations and governments. The loss of biodiversity is a major factor in the emergence of some of the new viruses, so it is important that we enable businesses to invest in and track their supply chains closely. In this way, we will contribute to ensuring that issues such as deforestation and natural habitat loss are eventually removed.

All of these challenges will not vanish immediately, and we will only be able to solve them by ongoing, focused efforts by consumers, governments, and investors.

Stuart Paterson is Executive Director at International Julius Baer


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