ESG in Action: How Sustainable Investing Interacts with Existing Scenarios

Fintech disruption looks at near-term efficiencies from technology and longer-term tech implications for data and investment analysis. Innovations in data retrieval, data management, and data mining will have a significant influence on the industry.

Fintech can create particular value for sustainable investing, especially through the retrieval and evaluation of alternative and soft data. Greater data availability allows investors to create more customized sustainability objectives, uncover new investment opportunities in this area, and better measure impact. Systematic investment processes and retail allocation platforms will need to disclose ESG product features. The need for greater data analysis, plus a need for trust and human judgment when investing with a values orientation, will necessitate an AI + HI (artificial intelligence plus human intelligence) approach.

Parallel worlds focuses on changes in demographics and how people from different regions, generations, and social groups engage differently with each other, with specific application in financial services and the capital markets. Although the internet allows us to interact with other social, cultural, and generational groups, instead of increasing understanding, it has led to wider differences in values, cultural norms, and preferences.

The growing inclination of a large segment of the population to try to express their preferences in all their purchases makes it only natural that defined contribution plans and other retail investment vehicles would seek products where investment providers use ESG divestments and tilts, and carry out more engagement with companies. This will be characterized by personalization related to sustainability and responsibility. We also see more populist movements that try to mobilize change in environmental and social areas by exercising influence on finance and business.

Lower for longer looks at expectations for low global growth rates, interest rates, and target investment returns continuing in the future, and their impact on investment strategies and the development of the investment industry. The key aspect is that investment returns going forward seem likely to be less than adequate to meet solvency demands and end-investor expectations, particularly in pension funds.

This is a challenge for underfunded pension plans that may be less likely to increase their commitment to ESG investing if there is an expectation that there is a return trade-off. However, the continuing appetite for alpha, combined with reduced return expectations for more traditional investment opportunities, may lead more investors to products with greater return potential from sustainability themes, such as private assets with impact objectives in renewable energy, energy efficiency, and resource scarcity.

Purposeful capitalism envisions an industry with a greater focus on ethics, professionalism, and serving the interests of clients and society. Sustainable investing is deeply embedded in this scenario.

Unlike other scenarios, purposeful capitalism requires a mindset change that aligns the purpose and objective of the investment industry with the expectations of investors. The benefits of its activities ultimately accrue to society as a whole and strengthen the industry’s social license to operate. Keeping that license “clean” means financial organizations must manage reputational issues and combine their financial views with some exposure to wider stakeholders, including consideration of prosocial issues.

Purposeful capitalism also calls on investment organizations to be proactive in helping solve the world’s problems, but to remain grounded in good sense on materiality. This will require an emphasis on total system-wide returns on capital rather than just a localized focus. This scenario has been reinforced by the COVID-19 pandemic, which has brought more attention to major system-wide risks — particularly climate change, racial justice, social inequality, and the social responsibilities of business activities in these areas.

Climate energy describes the increased energy and effort directed toward managing the effects of climate change on investment portfolios and the effects of investment portfolios on climate change.

In this scenario, climate conditions continue to evolve adversely, as climate science has suggested, and the trajectory of climate change is a major destabilizer to geopolitical conditions. Popular attention grows as “climate emergency” issues start to settle into deeper societal and governmental consciousness. Governments, regulators, and firms collectively work in a new direction toward recognition of climate issues. Significant traction to the direction set in the Paris Agreement is developed through further Conference of the Parties (COP) initiatives. Innovation in breakthrough carbon-reducing technologies, such as renewable energy and direct air capture, start to emerge but take time to achieve industrial scales.

Social status describes the growing importance and materiality of social factors. In this scenario, companies increasingly must demonstrate their purpose and the benefits of their operation to all stakeholders. This stakeholder mindset supplants shareholder primacy, so greater focus is given to acts of social responsibility in all settings: clients, workforce, suppliers, community, and environment. More companies have a mission to address issues of inequality. Increasingly, the business plans of companies are more specifically aligned to the UN Sustainable Development Goals (SDGs) and identify positive impacts and targets that are intrinsic to this rubric.

The health and safety of various communities becomes a larger consideration following the COVID-19 pandemic. Companies’ responses include a higher standard of care for employee well-being and engagement. The diversity and inclusion field grows markedly. There is much more attention to and action on fairness and justice within companies. There is also increased attention to worker rights in the supply chain by companies taking more responsibility for its social integrity.