THE the integration of environmental, social and governance criteria in stock market portfolios is well established. Investors have a huge choice, with funds focusing on everything from biodiversity and green infrastructure to renewable energy. However, for investors trying to build a diversified portfolio, incorporating areas such as commercial real estate or fixed income securities, this has been much more difficult.
There are good reasons for this. If someone owns shares in a business, they are co-owners and therefore have a say in how it is run. They can show up at shareholder meetings and slam the drums on climate change or board diversity. They can vote against inactive management teams. They can team up with other shareholders to engage with business leaders and lobby for change.
For fixed income investors, it’s a different relationship. The fixed income investor lends money to a business, but has no say in how the business is run. Therefore, forcing change is much more difficult. This has been done, but often only when an asset management group is also a significant owner of shares.
However, that is about to change. The first significant change was the emergence of a “green bond” market. This is where companies and governments issue bonds specifically dedicated to green projects: a company may seek to shift its energy supply to renewable energies. The Spanish government recently issued its first green bond, for example, designed to fund initiatives in clean transport, wastewater, pollution and biodiversity, among others.
The green bond market is now around $ 1.4 trillion in size1 with expanding emissions every year. Many initiatives of the EU’s Green Deal are likely to be financed by green bonds, offering a new choice for investors. Faced with this expansion, there are now a number of funds specializing in green bonds, including funds from Allianz and iShares.
Concerns over green bonds have been issuers carving out their green projects, turning the rest of their bonds “brown”. There have also been concerns about “greenium” – a premium paid for green bonds over regular bonds. There’s no reason to think it will go down, but at a time when bond yields look unattractive anyway, it’s a point to consider.
There are also signs that ESG considerations are becoming more important in commercial real estate. With around 18% of the UK’s carbon emissions coming from non-domestic buildings, this is a key focus area if the country is to achieve net zero emissions.2
Likewise, as companies commit to achieving a net zero goal, the buildings they occupy are a key contributor to their carbon footprint. They are pushing homeowners to create “smarter” buildings – with solar panels, energy efficiency measures and easy access. Homeowners such as Aberdeen or Columbia Threadneedle recognize the competitive opportunity to create greener buildings which should attract greater demand for tenants.
Overall, the expansion of ESG considerations into new asset classes is welcome, allowing investors to build fully diversified sustainable portfolios. For example, the Foresight UK Infrastructure Income Fund, which is listed on the Fidelity Select 50, aims to generate income from the renewable energy and infrastructure sectors.
ESG investing has also helped fund groups create sustainable multi-asset funds that provide investors with everything in one place. Increasingly, investment managers are moving towards a world where ESG is the norm rather than the exception.
Learn more about sustainable investing and ESG