Future Returns: Sustainable Investing Poised To Gain Assets
The Global Sustainable Investment Review indicates assets are rising quicky.
4 min
Assets in sustainable strategies are rising at a fast clip globally, with US$35.3 trillion invested as of 2020, according to a report out this week from the Global Sustainable Investment Alliance or GSIA, an international collaboration of membership-based sustainable investment organisations.
With several changes afoot in regions across the world, these figures are likely to climb further by the time the next report is released in two years. In the U.S.—where 48% of sustainable investing assets resided as of the beginning of 2020, according to the report—potential regulatory and legislative changes are expected to spur further interest in sustainable strategies.
The report, titled the Global Sustainable Investment Review (GSIR), is based on data provided through Dec. 31, 2019, with the exception of Japan, where the data is collected through March 31, 2020.
In part, that’s because these changes will lead to a rise in investments by individual investors in sustainable investing—which include a range of strategies emphasizing environmental, social, and governance, or ESG, matters. Currently about 25% of all investments in sustainable strategies are by “non-institutional” investors, a figure that held steady between the last two reports.
One reason assets haven’t expanded as fast in the retail market is that growth typically comes from retirement funds, where a majority of retail assets are invested, says Lisa Woll, CEO of US SIF: The Forum for Sustainable and Responsible Investment, a membership organization focused on shifting investment practices to sustainability.
And, Woll points out, the U.S.’s largest retirement plan—the US$760 billion Federal Thrift Savings Plan—doesn’t offer any ESG options to its 6.2 million members, Woll says.
Beginning next summer, however, members will be offered the option of investing in ESG mutual funds in response to a May executive order on climate-related financial risk from President Joe Biden.
Among several items, the order asks the secretary of labour to assess “how the Federal Retirement Thrift Investment Board has taken environmental, social, and governance factors, including climate-related financial risk, into account.”
“We’ve worked on this for a decade, to get them to implement that,” Woll says.
Penta recently spoke with Woll about trends in sustainable investing globally and in the U.S., much of which was detailed in the group’s own report on sustainable and impact investing trends in November.
Shifts in the U.S. Regulatory Landscape
Another drag on asset growth in retirement funds was the “anti-ESG agenda” of former President Donald Trump’s administration, Woll says. “Now, it’s a new era.”
The U.S. Department of Labor in March stated it would not enforce Trump-imposed rules limiting the ability of retirement-plan administrators to consider ESG factors in retirement options, and to engage in proxy voting on ESG-related issues, according to the report.
Also in March, the Securities and Exchange Commission took initial steps that could result in requirements by corporations to disclose climate-related risks to their operations in addition to a “potentially a broader set of ESG issues,” the report said.
More broadly, the Biden administration is addressing several ESG themes in addition to climate. One example is labour rights, the subject of the new White House Task Force on Worker Organizing and Empowerment.
The potential implications for ESG investing from the array of government actions taken so far, and those to be expected, haven’t fully been analysed yet, and could be significant. The climate-change directive, for instance, “affects so many different agencies in different ways,” Woll says.
And, she notes, a more recent executive order on competitiveness includes language about treating employees better, which is a key governance concern for investors.
It’s about “creating better capitalism and better companies,” Woll says. “There are all kinds of interesting focal points, including diversity, equity, and inclusions—big policy priorities for the administration and our members.”
The Rise of ESG Integration
By far the most popular sustainable investing strategy—representing US$25.2 trillion in assets globally—is “ESG integration,” an approach where ESG factors are explicitly included in financial analysis, according to the GSIA.
That’s a major switch from 2018, when negative screening was the most popular global strategy with nearly US$20 trillion in assets compared to US$15 trillion by 2020. Negative or exclusionary screening—which remains highly popular in Europe—removes categories of investments such as companies engaged in making weapons or tobacco, or those involved in human rights abuses, versus seeking out companies engaged in best ESG practices.
One reason for the popularity of this approach is that any investment manager who wants to get business increasingly needs to be a signatory to the Principles of Responsible Investment (PRI), a U.N.-sponsored network of investors, Woll says. “ESG integration was very much the preferred strategy taken up by those signatories.”
In the U.S. Woll is concerned, however, that many companies offering ESG integration strategies don’t clearly articulate their criteria, making it difficult for investors to know what kind of impact their investments are having.
“We have to have more transparency around this,” she says.
The Global Picture
While the GSIR report provides a good snapshot of sustainable investment trends in five major markets (the U.S., Canada, Japan, Europe, and Australia/New Zealand), it also reveals a sector that’s in flux as changing frameworks, regulations, and definitions make it difficult to precisely track global trends.
For instance, in Europe, assets invested in sustainable strategies fell 13% to US$12 trillion from US$14 trillion in 2018. But that decline simply reflects changes in regulatory definitions that no longer include some products or strategies.
In Australia and New Zealand, assets grew to US$906 billion from US$734 billion, but the growth was at a slower pace because of new industry standards for sustainable investment.
Given different strategies and different regulatory environments, the countries from major markets involved in the report are recognizing that field-builder institutions such as US SIF or the European Sustainable Investment Forum need to be resources for best practices, Woll says.
Reprinted by permission of Penta. Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: July 20, 2021
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Competitive pressure and creativity have made Chinese-designed and -built electric cars formidable competitors
4 min
China rocked the auto world twice this year. First, its electric vehicles stunned Western rivals at the Shanghai auto show with their quality, features and price. Then came reports that in the first quarter of 2023 it dethroned Japan as the world’s largest auto exporter.
How is China in contention to lead the world’s most lucrative and prestigious consumer goods market, one long dominated by American, European, Japanese and South Korean nameplates? The answer is a unique combination of industrial policy, protectionism and homegrown competitive dynamism. Western policy makers and business leaders are better prepared for the first two than the third.
Start with industrial policy—the use of government resources to help favoured sectors. China has practiced industrial policy for decades. While it’s finding increased favour even in the U.S., the concept remains controversial. Governments have a poor record of identifying winning technologies and often end up subsidising inferior and wasteful capacity, including in China.
But in the case of EVs, Chinese industrial policy had a couple of things going for it. First, governments around the world saw climate change as an enduring threat that would require decade-long interventions to transition away from fossil fuels. China bet correctly that in transportation, the transition would favour electric vehicles.
In 2009, China started handing out generous subsidies to buyers of EVs. Public procurement of taxis and buses was targeted to electric vehicles, rechargers were subsidised, and provincial governments stumped up capital for lithium mining and refining for EV batteries. In 2020 NIO, at the time an aspiring challenger to Tesla, avoided bankruptcy thanks to a government-led bailout.
While industrial policy guaranteed a demand for EVs, protectionism ensured those EVs would be made in China, by Chinese companies. To qualify for subsidies, cars had to be domestically made, although foreign brands did qualify. They also had to have batteries made by Chinese companies, giving Chinese national champions like Contemporary Amperex Technology and BYD an advantage over then-market leaders from Japan and South Korea.
To sell in China, foreign automakers had to abide by conditions intended to upgrade the local industry’s skills. State-owned Guangzhou Automobile Group developed the manufacturing know-how necessary to become a player in EVs thanks to joint ventures with Toyota and Honda, said Gregor Sebastian, an analyst at Germany’s Mercator Institute for China Studies.
Despite all that government support, sales of EVs remained weak until 2019, when China let Tesla open a wholly owned factory in Shanghai. “It took this catalyst…to boost interest and increase the level of competitiveness of the local Chinese makers,” said Tu Le, managing director of Sino Auto Insights, a research service specialising in the Chinese auto industry.
Back in 2011 Pony Ma, the founder of Tencent, explained what set Chinese capitalism apart from its American counterpart. “In America, when you bring an idea to market you usually have several months before competition pops up, allowing you to capture significant market share,” he said, according to Fast Company, a technology magazine. “In China, you can have hundreds of competitors within the first hours of going live. Ideas are not important in China—execution is.”
Thanks to that competition and focus on execution, the EV industry went from a niche industrial-policy project to a sprawling ecosystem of predominantly private companies. Much of this happened below the Western radar while China was cut off from the world because of Covid-19 restrictions.
When Western auto executives flew in for April’s Shanghai auto show, “they saw a sea of green plates, a sea of Chinese brands,” said Le, referring to the green license plates assigned to clean-energy vehicles in China. “They hear the sounds of the door closing, sit inside and look at the quality of the materials, the fabric or the plastic on the console, that’s the other holy s— moment—they’ve caught up to us.”
Manufacturers of gasoline cars are product-oriented, whereas EV manufacturers, like tech companies, are user-oriented, Le said. Chinese EVs feature at least two, often three, display screens, one suitable for watching movies from the back seat, multiple lidars (laser-based sensors) for driver assistance, and even a microphone for karaoke (quickly copied by Tesla). Meanwhile, Chinese suppliers such as CATL have gone from laggard to leader.
Chinese dominance of EVs isn’t preordained. The low barriers to entry exploited by Chinese brands also open the door to future non-Chinese competitors. Nor does China’s success in EVs necessarily translate to other sectors where industrial policy matters less and creativity, privacy and deeply woven technological capability—such as software, cloud computing and semiconductors—matter more.
Still, the threat to Western auto market share posed by Chinese EVs is one for which Western policy makers have no obvious answer. “You can shut off your own market and to a certain extent that will shield production for your domestic needs,” said Sebastian. “The question really is, what are you going to do for the global south, countries that are still very happily trading with China?”
Western companies themselves are likely to respond by deepening their presence in China—not to sell cars, but for proximity to the most sophisticated customers and suppliers. Jörg Wuttke, the past president of the European Union Chamber of Commerce in China, calls China a “fitness centre.” Even as conditions there become steadily more difficult, Western multinationals “have to be there. It keeps you fit.”
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
