Risks and opportunities in sustainable investing constantly shifting

Both positive and negative influences are fuelling the evolution of sustainable investing, says Juan Lois, executive director and lead strategist (Americas) on the J.P. Morgan Asset Management sustainable investing team.

Lois said technological advancements, new government policies and shifting consumer preferences are among the variables creating headwinds and tailwinds for sustainable investors.

“Many ESG factors can materially impact a company’s long-term performance,” he said. “Investors need to understand the financially material risks and opportunities companies must navigate.”

Lois said financial advisors should learn the motivations of clients who want to incorporate ESG considerations into the investment process. Some are focused purely on financial returns, while others want to save the planet, and still others are moved by social values and political views.

“It’s important to understand these goals, as asset managers develop investment strategies in response to client demand,” he said.

Above all, ESG concerns should not be considered separate from fiduciary responsibility, he said. Rather, integrating financially material ESG factors is part of managing assets in the best long-term interests of clients.

“When companies and other securities issuers manage [ESG] factors well, they are more likely to be efficient, less exposed to regulatory and reputational risk, and offer opportunities for our client portfolios,” he said.

Lois said assessing a company’s ESG efforts contributes to risk management and, ultimately, long-term financial returns.

“We believe this is wholly consistent with our fiduciary obligations,” he said.

Among the biggest challenges for investors is understanding where ESG fits in the current market volatility.

“The growth of ESG investing comes against the backdrop of massive economic change,” he said. “Companies around the world are increasing their adoption of clean technologies, embracing carbon-reduction targets, and enhancing the disclosure of their business’ environmental footprint — all of which can and is impacting their ability to successfully generate returns amongst an increasingly challenging and competitive landscape.”

Lois said the clean energy transition is particularly complex. For instance, green technologies often rely on materials found in only a few places around the world, where their procurement raises human rights and labour issues.

“A good example is cobalt, which is a core input for battery production in electric vehicles, but whose supply chain struggles with human rights and labour issues,” he explained. “While investors are increasingly demanding that companies conduct rigorous due diligence on suppliers, this intervention on its own is not sufficient to eradicate child labour from cobalt production, especially in light of the growing number of informal, small-scale mines that many families rely on.”

With the demand for batteries expected to grow by as much as 30% a year through 2030, investors will have to balance financial opportunity with efforts to relieve human suffering.

“The extent to which an industry or company is managing financially material social risks and opportunities is becoming increasingly important to long-term investors,” he said.

Lois said governments and central banks have an important role to play in green and sustainable investing. Europe has been leading the way with a number of green initiatives, and recent U.S. measures such as the Inflation Reduction Act are encouraging companies and investors to redirect capital to green manufacturing and sustainable technologies.

“We expect to see a similar alignment in the major Asian markets, which will serve as a critical catalyst in driving the growth of the sustainable investing market in the region,” he said.

As for ESG disclosures, he pointed out that regulators are becoming more proactive about demanding sustainability-related information from industry, such as diversity statistics, employee pay and carbon emissions.

“This allows both consumers and investors to make more informed choices,” he said.

While policy in this area is moving quickly, it is largely a collection of regional efforts.

“We have yet to see standardization at a global level take root,” he said.

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.