Ben Constable-Maxwell
Head of Impact Investing, M&G
People increasingly understand that having a sustainable investment portfolio isn’t simply good for people and the planet, but it can also generate sound financial returns.
Sustainable investing is on the increase and has now gone “mainstream”, according to the World Economic Forum. So, when and why did it become so popular?
“The ratification of the UN Sustainable Development Goals in 2015 didn’t exactly open the floodgates to sustainable investing,” says Ben Constable-Maxwell, Head of Impact Investing, M&G. “But it did get policymakers, businesses – and investors – speaking the same language about the goals that society needs to address.
“And rightly so, because the scale of the challenges we face, whether climate change, biodiversity loss, poor health or social exclusion, requires a systemic response. These are becoming dominant issues for governments globally, as well as being increasingly front and centre for sustainable investors. Progress has been made, but there is much still to do.”
The simple way to explain sustainable investing is “investing for the long-term in businesses that are aligned with society’s objectives and supporting the sustainability agenda,” notes Constable-Maxwell.
“That can mean avoiding investment in bad actors that are harming people and the planet, or aligning portfolios with businesses that promote fair pay and decent work, or even Investing to drive real-world positive change.”
Influencing company policy
There is, however, a more nuanced take on how to effect that change, with ‘shareholder engagement’ at one end of the scale and ‘investment in solutions’ at the other.
On the ‘engagement’ side, Constable-Maxwell gives the example of private market investors who hold a controlling stake in a business. “Their influence can set the right standards and practices that help the business deliver more responsible, sustainable outcomes, such as improving environmental performance, working conditions or diversity,” he says.
Public market investors can vote at annual shareholder meetings but tend to have smaller stakes in a business and therefore less of an influence over, say, its net zero strategy. “However, together with other investors, they can collaboratively push for change,” explains Constable-Maxwell. “This stewardship approach can be hugely effective and applies to businesses in every sector.”
Evidence suggests that sustainable companies are able to borrow at lower rates and generate higher returns on their investment.
Delivering sustainable outcomes
The ‘solutions’ side, meanwhile, involves allocating capital to businesses that are intentionally tackling major problems, such as sustainable packaging to reduce plastic waste, technologies to help high-carbon sectors decarbonise or mobile banking to enable economic empowerment for vulnerable groups. Even though it is part of the sustainable investing spectrum, Constable-Maxwell notes that this is, technically, “impact investing.”
Often, ‘social’ and ‘environmental’ impact areas are thought of as distinct and separate. Yet Constable-Maxwell stresses that to make a real difference, investors must take a holistic view of sustainability. “Inter-connected problems can’t be treated on their own,” he says. “It’s myopic to invest in climate solutions without considering how the energy transition might affect vulnerable communities in parts of the world.”
Good returns in the long-term
Sustainable investing clearly has a positive role to play, but can it offer sound returns too? Work to understand the link between sustainability and financial performance is still ongoing, admits Constable-Maxwell. “Yet academic evidence suggests that sustainable companies are able to borrow at lower rates and generate higher returns on their investment. They also tend to avoid reputationally damaging controversies. In time, we believe irresponsible or polluting businesses will have to pay for the social damage they cause.
“Now, whether all of that translates into good financial performance in a given time period will be subject to economic and market dynamics. But we believe that over the long-term, sustainable businesses will be more successful because regulators, customers, employees and investors will all reward them.”
