How sustainable are sustainable investing returns?

Square Mile Research

How sustainable are sustainable investing returns?

Jake Moeller, Associate Director of responsible investment research at Square Mile Research and Consulting

Fashions come and go – even in investments. Yet, despite a challenging period for sustainable fund performance over recent years, it's clear that responsible investing isn't just a passing trend. In fact, it’s now positioned for enduring growth thanks to:

Increasing regulatory support
Technological advancements
Shifting global priorities toward carbon reduction and resource efficiency

So, while short-term fluctuations may impact returns, long-term tailwinds look set to reinforce the value of patient capital in this field. Those long-term tailwinds are blowing in from all sides of the globe, too. For instance, whatever the controversies around events like COP 29, they emphasise ambitious climate finance goals and increased investment in renewables and energy efficiency, encouraging nations to align with sustainable investment pathways.

What are the key drivers behind sustainable investing?

Bearing this backdrop in mind, delving into those tail-winds in more detail helps emphasise why responsible investing is, by no means, a fad.

Regulatory support

Governments and regulatory bodies are increasingly encouraging sustainable investments. In the U.S., the Inflation Reduction Act (IRA) is mobilising substantial capital towards renewable infrastructure and clean energy, providing billions in tax incentives that catalyse private sector investment. Similarly, the EU's Sustainable Finance Disclosure Regulation (SFDR) and the UK's Sustainable Disclosure Regulations (SDRs) are fostering transparency, helping investors make more informed, reliable choices in sustainable funds. This shift reduces "greenwashing" and will continue to build trust in sustainable funds.

Technological advancements

Technological innovation is another powerful force driving sustainable investments. AI advancements, for instance, promote sustainability by optimising energy use, reducing costs, and increasing efficiency, particularly within data centres. Additionally, improvements in renewable technology (like solar and wind) enable the scaling of low-carbon power sources. Investments in circular economy initiatives, such as biofuel production and waste management, further highlight how resource efficiency drives returns and reduces environmental impact.

Global commitment to carbon reduction

The transition from fossil fuels to cleaner energy sources remains essential to achieving global climate goals. The transportation, construction, and manufacturing sectors are all expected to decarbonise over the coming decades, which requires substantial capital for new technologies and infrastructure, offering growth opportunities for sustainable investors. While large-scale energy transitions require prolonged periods for infrastructure adaptation and regulatory alignment (making patience essential for investors looking to realise gains), geopolitical and energy security concerns underscore the need for domestic

renewable energy sources, adding a layer of strategic importance to sustainability investments.

Carbon markets also play a critical role in meeting climate targets by attributing a cost to emissions. However, issues like fraud have historically undermined carbon market credibility. The development of more robust trading standards and technology improvements are expected to address these challenges, enhancing the markets’ effectiveness and integrity.

What does the future hold for sustainable investments?

Fund gatekeepers, such as us at Square Mile, are increasingly selective of which fund managers we will have relationships with. Square Mile’s 3D model of avoiding harm, doing good and leading change is now integrated into our broader fund selection process. Fund groups that score well on these criteria are likely to be the ones with whom we form closer relationships for our investors.

Elsewhere, shareholders are also increasingly realising that bad actors can destroy shareholder value, so are consequently demanding sustainable practices be followed. Pressure on company management to do good, avoid harm and lead change is resulting in changes to the way companies are run and influencing the products and services they offer.

So, when this style of stewardship is coupled with the convergence of regulatory frameworks, technological advancements, and a global commitment to decarbonisation, the case for sustainable investing has never been stronger. Now, therefore, as the world navigates environmental and social challenges, sustainable investing provides a critical avenue for resilient, patient capital, securing both financial returns and societal benefits in the long run.

Disclaimer

This document is issued by Square Mile Investment Consulting and Research Limited which is registered in England and Wales (08791142) and is a wholly owned subsidiary of Titan Wealth Holdings Limited (Registered Address: 101 Wigmore Street, London, W1U 1QU).

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