In the ever-evolving landscape of sustainable investing, a new trend is emerging that could reshape how we approach environmental, social, and governance (ESG) investments. Morgan Stanley's Institute for Sustainable Investing has identified a shift towards what they call "sustainable improvers" - companies that may not be considered sustainable today but show clear potential for positive change.
The Rise of Sustainable Improvers
Redefining Sustainable Investments
Traditionally, sustainable funds have focused on companies already boasting strong sustainability credentials. However, this new approach opens the door to a broader range of investments, including:
- Clothing companies working to reduce waste and improve social responsibility in their supply chains
- Manufacturers adopting processes to reduce their carbon footprint
- Energy companies with robust transition plans towards renewable sources
This shift represents a more nuanced view of sustainability, recognizing that driving change in less sustainable sectors could potentially have a more significant impact on global sustainability goals.
The Energy Sector Dilemma
One of the most striking aspects of this trend is the evolving attitude towards traditional energy companies. Between 2018 and 2023, sustainability funds reduced their holdings in these companies from 3.7% to 1.8%. However, recent surveys suggest a changing perspective:
- 51% of investors would consider investing in fossil fuel-based energy companies if they have robust transition plans
- Less than a quarter would exclude them entirely on environmental grounds
This shift could potentially lead to more engagement with energy companies, encouraging and supporting their transition to more sustainable practices.
Real Estate: An Unexpected Opportunity
The real estate sector, often underweighted in sustainable funds, is emerging as a potential sustainability powerhouse. Building operations and construction account for around 40% of global energy-related CO2 emissions, presenting a significant opportunity for improvement. Renovations and retrofits not only enhance a property's sustainability but can also create financial benefits for tenants, owners, and lenders.
Challenges and Opportunities
While this approach opens up new investment opportunities, it also presents challenges:
- Defining and measuring potential for improvement
- Assessing the credibility of transition plans
- Balancing short-term financial performance with long-term sustainability goals
However, new regulatory frameworks and disclosure guidelines are making it easier for investors to gauge a company's sustainability trajectory. For instance, the Science Based Targets initiative (SBTi) and the UK's Transition Plan Taskforce (TPT) are developing standardized benchmarks and disclosure frameworks.
Implications for Investors
This trend towards "sustainable improvers" could have several implications for investors:
- Expanded investment universe, potentially leading to more diversified portfolios
- Opportunities to engage with companies and drive positive change
- Potential for higher returns if sustainability improvements lead to stronger financial performance
- Need for more sophisticated analysis to identify genuine improvers versus greenwashing
The emergence of the "sustainable improvers" approach represents a maturation of the ESG investing field. It acknowledges the complexities of global sustainability challenges and the role that transitioning companies can play in addressing them. For investors, this trend offers new opportunities to potentially drive both financial returns and positive environmental and social change.
As always, thorough research and careful consideration of both the potential and the risks will be crucial for investors looking to capitalize on this emerging trend in sustainable investing.