As concerns that the next financial crash may be climate-related grow, impact investment and green finance products are “going mainstream” and ceasing to be classed as a “niche” area, global investment management firm BlackRock has claimed.
Published on 1st of February, the firm’s latest global insights report reveals that around $760bn (£581bn) was invested in dedicated sustainable funds across the US and Europe last year, up from $453bn (£346) in 2013. To facilitate this increased demand for green finance products, more than 100 new sustainable mutual funds were reportedly launched in the US alone between 2015 and 2017.
The report also charts the progress made in 2018 by financial products with ethical or social sustainability measures (ESG) against those which did not.
In the US, annual return for ESG-focused equity benchmarks was 14.5%, compared with 14.4% for those without any ESG credentials. The difference across the rest of the world, meanwhile, stood at 8.1% vs 7.7%.
These findings come after decades in which the global investment community has widely perceived green finance products as volatile or unprofitable, Blackrock’s global head of sustainable investing Brian Deese said.
“For years, many investors saw sustainable investing as a trade-off – they viewed it as a sacrifice of value for ‘values’,” Deese said.
“There is now increasing awareness that material sustainability-related factors can be tied to a company’s long-term growth potential. This makes sustainable investing something investors can no longer afford to ignore.”
The report specifically draws on 2016 research from Harvard Business School, which concluded that corporates with strong measures in place to tackle material sustainability measures are likely to outperform their sector average in terms of finance.
This alignment of sustainability and profitability, BlackRock claims, has made ESG-focused investments particularly attractive to cautious, millennial investors. It has additionally spurred governments across “most major geographies” to increase their regulatory requirements for sustainability when making loans and approving grants, the report states.
These claims come off the back of several pieces of research concluding that young investors are leading the growth in demand for ESG-focused finance.
A survey by sustainable investment firm Triodos Bank, for example, found that almost half (47%) of investors aged 18-34 intend to invest in a socially responsible investing (SRI) fund within the next nine years. Within this age group, 56% of respondents also said they are motivated to invest in an ethical fund because of climate-related disasters in the news, compared to 30% for older counterparts.
Green bond boon
In related news, US-based financial services giant Moody’s Investor Services has this week published its annual client report, outlining its predictions for the green bond market in 2019.
The firm is forecasting a 20% year-on-year increase in US-based green bond issuance this year, following sharp market growth in 2016 and 2017 but slower progress in 2018.
This increase is likely to be driven by the nation’s energy and utility sectors, according to Moody’s with 30% more green bonds in this area expected to reach maturity this year than in 2018. This will provide corporates in these industries with more refinancing opportunities, the report states.
As the green bond market continues to mature, Moody’s has forecast “continued diversification” in issuance in terms of sector, region and use of proceeds.
The firm is has also predicted that 2019 will see greater clarity on the definition of “green” finance. What is considered “green” currently varies from investor to investor and from bank to bank, both in terms of business clientele and financial offerings from the sector.
This prediction comes at a time when the European Union’s (EU) High-Level Group on Sustainable Finance is calling for the introduction of an EU sustainability taxonomy, a definition of priority investment areas, the clarification of investor duties and development of “official” European sustainability standards for green bonds.