“The tipping point is that magic moment when an idea, trend, or social behaviour crosses a threshold, tips and spreads like wildfire”
Source – Malcom Gladwell, Tipping Point
In the four years that we have been talking about our global sustainable equity strategy, our conversations with prospects have changed markedly. Back when we started, many were concerned about what we excluded – the perceived opportunity cost of investing sustainably (no tobacco, oil and gas etc.) Fast forward and we are now experiencing sustainable FOMO! Increasingly the conversation is around the opportunity cost of not investing sustainably. This is a significant change in attitudes.
Are we at a sustainable investing tipping point? Many (especially those with funds to sell) think we are. But if we are approaching it, climate change is the key driver. Scientific and policy consensus on the issue is driving more sustainable behavioural changes (not just climate related), opinions (despite the bots), knowledge, technologies, social norms and investment. All of which are inter-related, complex and like Malcolm G. says above, difficult to stop.
And climate policy itself is only accelerating – the Paris Agreement has a so-called ‘ratchet mechanism’ designed to crank-up policy ambition over time and keep global temperature increases to well below 2 degrees C. In 2023, there will be a global stocktake to assess collective progress (not that good by the way). As we have written previously, the process of decarbonisation will not be linear and growing awareness and momentum makes a near-term forceful policy response more likely (in part, enabled by more favourable clean energy economics).
The Paris Ratchet Mechanism
Source: The Inevitable Policy Response, Vivid Economics
Investors are not immune to this sustainability contagion. The regulatory push on investors to consider ESG is strong. And while the full implications of various ESG capital markets policies are unclear, proposed and adopted regulation has the potential to fuel significant asset reallocation. Global ESG capital market policies and regulations have nearly doubled globally since 2015 (to September 2019), according to Goldman Sachs.
Which all means that as we enter a new decade, we anticipate the strong momentum in sustainable investment (demand pull) at the end of the last 10 years will accelerate. It feels like we are at an inflection point (there, we have said it too now…). And if we are, we would also expect to see a greater focus on, and analysis of, sustainable investment strategies. Investors will become more discernible about who they entrust their money to and authenticity will be key. Sustainable investing is not a badge but a discipline, and by disciplined investing at the intersection of disruptive innovation and sustainability challenges, we believe we can meet this expected demand; delivering positive impact and alpha, with authenticity to our clients.
About the author
Ryan Smith is Head of ESG Research at Kames Capital. He joined Kames Capital in October 2000 as an SRI analyst and was appointed to his current position in September 2002. He has 19 years’ industry experience. His role involves managing the team that conducts the ESG screening process for our Responsible Investing funds. Ryan’s team also provides corporate governance screening and research for all equity investments, and conducts research into environmental and social issues. Before joining us, he worked as an environmental chemist for Severn Trent Water. Ryan has an MSc in Environmental Chemistry from Nottingham Trent University (as at 30 November 2019).