Ethical Investing: Here to stay?
- Investment Desk
- Oct 28, 2024
- 5 min read
Updated: Oct 31, 2024
In recent years, more and more investors choose to invest in assets that not only deliver great returns, but also help remedy environmental and socially conscious issues. A 2022 Stamford University study found that 70% of investors between the ages of 18 and 41 said they were very concerned about environmental issues. By contrast, just 35% of investors in older cohorts said the same thing.
Ethical investments have gained prominence over the years due to increasing concerns about climate change, social justice, and corporate governance. Climate change for example, has become more and more important as it poses enormous risks in the micro, and macro-economic levels. We continue to witness companies that fail to address ESG issues being termed as risky investments. This kind of investment prioritizes sustainable businesses and ventures that reduce long-term risks related to sustainability.
Contrary to past beliefs on ethical investments’ returns, broader research has shown that ESG-focused investments can perform as well as, if not better than, traditional/conventional investments. This kind of statistics shifts the perception of ethical investing from a niche concern to a mainstream financial & investment strategy. By prioritizing ESG- focused investments, investors can influence corporate behavior and drive positive change. One major change we saw was introduction of new policies in economies, that focus more on ESG. In 2023, 60% of new policies in developing economies were dedicated to sustainability and there was a 50% growth in sustainable finance measures[1]. Ethical investing is therefore becoming a necessity for compliance with laws and global standards, making it relevant to all types of investors, including institutional and retail investors.
The COVID-19 pandemic presented a pivotal moment in Ethical investing, with record amounts of money pouring into funds that aim to promote sustainability and social goods. 2020 saw ESG funds taking in US$51.1 billion of new money from investors and the sustainable fund market has continued to grow, reaching 3 trillion dollars in total assets in 2023.
In Africa, the African private equity sector has largely been ahead of the curve compared to other markets in regards to ESG integration. The African Private Equity and Venture Capital Association (AVCA) Sustainability Study demonstrated that, as early as 2017, 80% of investee companies in the continent had ESG considerations in their process from the investment’s inception. In 2011 South Africa was the second country (after the United Kingdom) to formally encourage institutional investors to integrate ESG factors into their investment strategies through launching the Code for Responsible Investing in South Africa.
Despite the increased interest in ethical investing, it may appear to be just a trend with the sustainable fund market reporting an 89% drop in net inflows from $557 billion in 2021, to $63 billion in 2023. Investors in 2023 remained cautious due to the macroenvironment, geopolitical risks and the overall underperformance in 2022 with lukewarm returns from popular sustainable investment assets. The disparity in this performance may have been attributed to short-term market dynamics that worked against these assets. Renewable energy, for example, was affected by elevated interest rates, since the sector is particularly characterized by higher upfront costs and lower operational expenses over time. In addition, the rising concerns in issues such as greenwashing and the growing uncertainties of ethical investing continue to deter investors from the market
Despite the challenging environment in 2023, in Europe, the sustainable fund market remained resilient in comparison to European conventional funds, demonstrating continued interest by investors in the asset category. In fact, the number of sustainability-themed funds worldwide reached 7,485, up 7 per cent from 2022. The growing concerns around greenwashing and the increasing complexities surrounding ethical investing may cause hesitation among some investors. However, we as a firm are confident that ethical investing is not just a passing trend, but rather a long-term shift in investment philosophy. This conviction is rooted in the fundamental drivers of ethical investing, particularly the urgency of addressing global challenges like climate change, which require substantial time and capital to resolve. The short-term fluctuations in the market, should not overshadow the long-term benefits of ethical investing, underscoring the importance of taking a long-term perspective.
In the current age, research shows millennial interest in ESG investments rising from 84% to 95% between 2015 and 2019. In Africa, 60% of the population is under the age of 25 and new generations bring heightened pressure on financial institutions to consider social justice and ecological sustainability. Data has also shown that companies using the combination of sustainability and technology-lead strategies are two and a half times more likely to rank among future top-performing businesses[1].
The economic and social implications of climate change, especially for agriculture-dependent economies, underscore its relevance. The direct financial impact on these sectors, combined with the social costs, such as rising food insecurity, have led to the emergence of a more conscious consumer base.
As stewards of capital, fund managers have a critical role to play in shaping a sustainable future. The challenges posed by climate change, environmental degradation, and social inequality are no longer distant risks—they are current realities with far-reaching economic and social consequences. The rising demand for ethical investments from increasingly conscious consumers and institutions further reinforces the need for the industry to adapt. Prioritizing investments in companies that are committed to sustainable practices, can ensure that fund managers’ portfolios are positioned to thrive in an evolving world. Ethical investments have become an essential element of risk management and value creation in today’s interconnected global economy. Truly, ethical investing is not just a moral obligation; it is a strategic imperative.
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