The announcement in recent weeks from the world’s largest funds manager, BlackRock Inc, that it intends to make sustainability the “new standard for investing” is just the latest indication that sustainable investing is about to go mainstream.
"Climate change has become a defining factor in companies' long-term prospects . . . sustainable investment options have the potential to offer clients better outcomes," wrote BlackRock chief executive Larry Fink in his annual letter to chief executives. "We want to make sustainable investing more accessible to all investors and lower the hurdles for those who want to act," the letter added.
Sustainable finance includes green bonds, socially responsible investing (SRI) investments, environmental, social and governance (ESG) factors, as well as sustainable infrastructural investments, climate finance, and performance bonds. It has also been identified as a key pillar in "Ireland for Finance", the strategy for the development of Ireland's international financial services sector to 2025.
Ireland issued its first sovereign green bond in 2018 but investments in these areas have accelerated in recent years, and the EU’s action plan on sustainable finance behoves investment firms to include ESG criteria in the financial advice they offer clients.
Sean MacHale, head of institutional strategy, connectivity and growth at Bank of Ireland Global Markets, believes the growth of sustainable investing shows no sign of slowing.
“The numbers speak for themselves in terms of year-on-year growth, with some analysts predicting sustainable investing could reach $50 trillion in the next two decades,” he explains, adding there are a number of factors driving this growth. These include investor demographics and investor demand while he notes that ESG can also minimise regulatory and data-related risks.
Yet, in most cases, it’s the bottom line making these investments attractive: “The main driver, however, has been performance – investments with high ESG scores tend to outperform,” he says.
Meet investor demands?
Unsurprisingly, customers are now insisting that ESG form a core part, if not the bulk, of their investments, but are there sufficient products available to meet investor demands?
The product range is evolving as our understanding of the benefits and impact of ESG increases, says MacHale.
“The product range is growing, notably Bank of Ireland’s launch of its €1 billion Sustainable Finance Fund in July 2019, with other new funds being launched and a growing demand for ESG ETF’s with record inward flows also in 2019. Products are evolving such as ‘green’ mortgages and loans as our understanding of the benefits and impact of ESG increases.
“I believe we will see an increase of new products coming on stream in 2020 and existing ESG products becoming more mainstream and refined.”
This new paradigm presents challenges but also opportunities for financial advisers, he adds. “ESG presents a unique opportunity for financial advisers to add value and help clients navigate the new investment landscape, creating better outcomes and returns into the future.”
Indeed, MacHale believes sustainable finance will eventually become the norm.
“Green bond issuance at the end of October 2019 stood at $210 billion, an increase of 41 per cent year-on-year, and smashed analysts’ projections,” he explains, adding that this is set to continue in 2020.
"Sustainable linked loans are becoming increasingly popular amongst corporates in Ireland, and in Europe, where discounts or premiums are applied to interest rates based on a borrower's sustainability metrics. With regulators now including climate risk in their assessments, this will accelerate the move to sustainable finance."
All this has knock-on effects for third-level education. Professor of operational risk, banking and finance at UCD's Smurfit Business School Andreas Hoepner is also a member of the EU Technical Expert Group on Sustainable Finance. He says the university is proud to offer a MSc in Renewable Energy and Environmental Finance, a postgraduate option that is increasingly popular for business graduates and finance workers keen to obtain a specialist qualification in this growing field.
‘Pressing societal problems’
“Sustainable finance has become one of the most important and effective ways to tackle many of our pressing societal problems,” says Hoepner. “It also features as a key contributor to the Irish Government’s new strategy for the financial services sector to 2025, of which sustainable finance is a key pillar.”
The recently revamped masters programme includes a full semester on finance: students study various cutting-edge aspects of financial services and this is then combined with insights from environmental sciences. Another pioneering aspect of the course is the green data science module where students learn how big data can be used to assess the environmental performance of companies, and how this links to business- and investment-relevant outcomes.
Demand for the course continues to grow year-on-year, and it is now offered as both a full-time and part-time programme, making it particularly suitable for those currently working in finance who are keen to expand their sustainable finance know-how. “This is an interdisciplinary area, with a need to know about sustainability, finance, and data science,” notes Hoepner.
“It is perfect for people mid-career who want to add a bit more sustainability in their profiles and more expertise in this area,” he adds. “If organisations are committed to supporting the Paris Agreement and achieving zero carbon emissions by 2050, then their staff should be trained in this area. Investors would also definitely expect that from organisations.”
While the masters programme remains unique, Hoepner believes there is a pressing need for similar courses in Ireland’s third-level institutions. While the requirement for sustainable finance has been flagged for almost two decades, he says it is now a “mainstream” concern and should eventually be incorporated into all third-level business courses.
“It is clearly mainstream now but 10 years ago it was a very strongly growing niche. We would expect a stronger focus as time progresses, and it may also be integrated into core curricula, although that is not currently the case.”