This tectonic shift has significant implications for the expected returns and relative pricing of assets not just those perceived to be sustainable but for every asset in the investment universe. Society’s long transition toward the practice of sustainable investing is likely to drive market adjustments for years and even decades. This shift is spurring political pressure, a regulatory push and technological advancements to create the foundations of a more sustainable world, leading to a change in investor behavior and setting in motion a major yet gradual capital reallocation. The past year has seen a marked shift in society’s attitudes toward sustainability. It means that we have now a new source of return across all asset classes and that will determine or change the way we should be building portfolios going forward. Demand and capital reallocation are only starting and will be moving slowly over time. The bottom line is this a long-term phenomenon that is going to play over years and decades. The bigger point here is that it’s not in the price.
So if something is more exposed to climate risk, you should be compensated more. And the third tenet is that if in fact it’s in the price, these risky investments should be providing you a greater compensation for holding that risk. The second is that if it’s already in the price, then you need to detract from your return objectives in order to achieve these sustainable objectives. The first one is that if sustainability is important, it should be reflected already in the price of assets.
The starting point of the discussion in the industry is based on three arguments. As these flows are happening, we would expect them to drive returns. We would expect as a result, capital to move away from the less green part of the economy to the greener part of the economy. This change in preferences means that different sectors of the economy or companies will be looked at differently.
What’s causing the sustainability wave? I think at the root of it, it’s the changing preference of society or a greater awareness of what the risk might entail going forward. It’s also about riding a wave that should be a source of return in itself. It’s not only about managing risk of climate change that might affect your portfolio. Sustainability is not a story about exclusion anymore.
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