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Sustainability-themed investing: an asset class of its own

Updated: Oct 11, 2022

How to hit a home run with Environmentally Positive and Profitable Investments

Your sustainable investment strategy is no longer a maybe. It’s a must.

With increasing momentum, the financial sector and capital markets are recognizing the moral imperative to use capital for good and the profits that this strategy can produce. External pressure is also mounting as regulatory agencies, clients, peer organizations and the public at large call for investment strategies that secure net-positive financial, social and environmental returns.

The problem is: industry know-how for creating successful sustainable investment strategy lags far behind the demand to make it happen.

As a result many strategies create unstable or unsuccessful investments because they lack:

  • Access to sourcing and deal flow, which often occupy different spaces than investments in conventional asset classes

  • Comprehensive understanding of sustainability concepts and technologies

  • A track record of investing with environmental benefit and teaming up with the types of entrepreneurs that lead with purpose

  • Appropriate diligence methods to evaluate the full spectrum of technical, business, financial, environmental and social issues

  • Specific know-how to appropriately structure environmentally positive and profitable deals

  • Experience in developing sound exit strategies from these kinds of investments

Sustainability investing is still a new ball game. So how do you field a winning team? How do you adjust your strategy?

As an investment professional, you may need to rethink how you evaluate and pitch the right opportunity. As a direct investor, you want to catch the right opportunity that can drive positive environmental outcomes and financial returns.

No matter what position you play, sustainability investing as a whole will drive responsible business practices and behaviors. What’s needed even more? Sustainability-themed investments that have financial market rate returns AND social and environmental impact that can help close the $2-3 trillion annual funding gap for nature to achieve the Sustainable Development Goals (SDGs) by 2030.

| Understanding the playing field

MBA and investment banking training may fall short when it comes to sustainability investing. Deals fail when investment bankers lack real, on-the-ground field experience of environmental and social issues. This lack of expertise coupled with ESG issues that may be separate from your core business, finance and decision making can make it difficult to achieve positive environmental outcomes that tie back to financial materiality. This is what we call "Lost in translation": the disconnect between the financial market (profitable investments) and social/environmental impact (positive outcomes for communities).

Across the field of sustainability investing (see fig. 1) consider where you or your clients fit. Is there a disconnect between capital and community impact? What key features are you looking for? What are your return expectations and what is your risk tolerance? By fielding a winning team, investment professionals and direct investors alike can develop a rewarding sustainable investment strategy that brings clarity and agreement on what to measure where, transparency and disclosure and then concerted action on positive outcomes that can put you in a league of your own.

Let's dig in.

Source: UNCTAD, adapted from Financing for Sustainability Report 2020

Market size data are UNCTAD’s calculation on Morningstar, the Climate Bond Initiative and GSIA

Responsible & Sustainability Investing 101:

Responsible investing refers to general investment funds that behave responsibly. It has evolved from what is known as SRI (Socially responsible investing) into a few different forms including negative screens. It then expanded to not only exclude investment in the worst things, but also advance some good things that could be categorized and measured manifesting into the Principles of Responsible Investing (PRI). PRI is where ESG was captured and reported, but was largely separate from core business, finance and decision making. The next big shift is ESG integration where these environmental, social and governance characteristics aren't just good things to think about after you set up an efficient core business, rather they can be integrated throughout the core business and help companies thrive in the long-term (and those companies have proven to be more profitable, have higher values, attain better multiples on exit and outperform their peers in the public markets).

As you move from Responsible Investing across the field to Sustainability-dedicated investments that target ESG or SDG-related themes or sectors, you can really begin to home in on investments that (a) integrate ESG factors into the core of business, finance and decision making; (b) have financial market rate returns; and (c) achieve positive social and environmental impact. Or in other words, a sustainability investment strategy that does the right thing and that will have you batting a thousand (making money!).

| Welcome to the Bigger Leagues (with a community feel)

Five plays Investment Professionals and Direct Investors need in order to hit their sustainability investments out of the park.

1. Equip yourself to field questions.

Before you can outline a course of action you must know the environment you are operating in. Understand the field of sustainability investing, the opportunity within it and then consider the questions below.

For an investment professional:

For a direct investor:

  • Why and what are you being asked about sustainable investments?

  • What aspects of sustainability are of interest to you and your clients?

  • Where do your clients fit within the field of sustainability investing - are they on or off the field? If there on the field, what ESG strategies are being employed?

  • What regulations apply?

  • What are you currently doing?

  • What offerings are available to you in public equities, private markets, fixed income and funds?

  • Where are your weaknesses when it comes to sustainability dealmaking?

  • What impact themes are of interest to you?

  • Where do you want to position that impact — throughout your portfolio or in specific allocations?

  • What are your current allocations?

  • Where do you fit within the field of sustainability investing - are you on or off the field? If you’re on the field, what ESG strategies are being employed?

  • What types, size and stage of investment are you seeking? What is available?

  • Where are you sourcing opportunities?

  • Who is advising you?

2. Cover all the bases.

Here, you’ll evaluate perceived obstacles including ESG risks and opportunities, screening and other ESG strategies.

Who's on first? As a team, we need to work together. We need to know each player's position and strengths. Earlier we mentioned the concept of "Lost in translation". We have the capital, but we also need the pieces in between -- the mediators, the translators, the execution partners -- to connect that capital to the communities that have the high-quality and credible investable products that can make a scalable impact.

Investable products. What's happening now is that many investors with capital are saying they have limited product to invest in, and on the other hand we have people executing impactful projects on the ground who say they have no access to capital. Both of them are wrong. We need to cover all the bases and make the right connections between all the right players to screen, diligence and increase access to high-quality and credible products and flow more capital.

ESG strategy. With your team in place and access to investable product, take a closer look at the key features of your ideal investment strategy and explore values alignment.

Curveballs around language, disclosure, and accountability. If you're confused, you're not alone. Better clarity and agreement is on the way to help determine what to measure where, transparency and disclosure thanks to recent initiatives including the Task Force on Climate-related Financial Disclosures (TCFD), EU taxonomy, and the Taskforce on Nature-related Financial Disclosures (TNFD).

For an investment professional or a direct investor:

  • What do you see when you look at your current portfolio with the aim of sustainability?

  • Are these investments aligned with your commitments or values?

  • What different options are available?

  • Who in your network or beyond can help you identify, vet opportunities, diligence, manage risk and assess on an ongoing basis?

Lost in Translation Illustration:

The Disconnect between capital and communities

More than half of global fisheries are represented by small-scale coastal communities. In recent years, several public and private funds have been established to invest in sustainable fisheries, yet the decisions are often being made by people who do not understand the fishing community context. At the same time, many communities don’t have the experience to articulate a business plan and commercial viability in the language of investors. That gap in shared understanding leads to the notion of limited deal flow or poorly structured and poorly performing deals.

In reality, sustainable harvest exists in a broader system of social, economic and community concerns that affect the commercial viability of a fishing business. In addition, many small fishing communities operate within informal economies that must be carefully understood and managed.

There are some excellent examples of sustainable fishing projects within these communities and contexts that are actively seeking and ready for investment. A challenge is often that the community practitioners don’t know how to deliver their pitch in a way that speaks to potential investors.

3. Step up to the plate.

It’s go time. It’s time to align your investment criteria and values, merging your conventional investment knowledge with opportunities for profit-bearing investments that support environmentally positive outcomes and contribute to achieving the SDGs.

For an investment professional:

  • Articulate your services within the field of sustainability investing.

  • Actively seek products across asset classes that respond to clients’ impact motivation.

  • Position these products in sales and distribution.

For a direct investor:

  • Develop a personal theory of change for sustainability, and formulate your investment thesis.

  • Determine thresholds for negative impact, opportunities for positive impact and tradeoffs you are willing to make.

  • Look across asset allocations and compare against your impact story.

When you work closely with a coach with on-the-ground know-how and global experience, you’ll be able to steer clear of deals that greenwash or otherwise don’t deliver, to source new deal flow with positive Environmental Rate of Return (ERR) and IRR.

The sustainability investment strategy that results will become your playbook and will allow you to adjust to external conditions and generate growth.

​Environmental Rate of Return (ERR)

​Environmental Rate of Return (ERR) is our proprietary and quantitative measure of 6 environmental categories that is used in the screening, diligence, risk management and ongoing assessment of all investments.

4. Swing for the fences (and for the next generations).

The sustainability investment strategy that results will become your playbook and will allow you to adjust to external conditions and generate growth.

You’ve trained for this. With this playbook in hand, now you can take some calculated swings with minimized risks to integrate sustainability more broadly and purposefully into your investment strategy — a strategy that drives forward profit alongside real environmental and social benefit.

5. Bring it on home.

For investment professionals there’s an extra, final play you can take that is a springboard for success: train your own winning team on how to coach their clients and help them connect capital to community impact.

It’s important to fully understand the opportunities within a sustainability strategy, the product offerings, the risk return profile and the case for investment to their clients — which is therefore a (growing) business opportunity for all players involved.

As coaches, your team should be able to:

  • Articulate the financial, environmental, social and personal benefits of sustainability investing.

  • Build a well-aligned portfolio across asset classes and product offerings.

  • Leverage the opportunity of having that portfolio available through marketing, sales, distribution and client services.

If you are...

  • a financial or investment advisor

  • an asset manager

  • a private bank

  • an institutional investor

  • a Family Office or high-net-worth individual

  • leading a corporations' investment strategy

...let EcoAdvisors be your coach.

EcoAdvisors brings clarity and agreement on what to measure where, transparency and disclosure and then concerted action on positive outcomes. We help articulate and integrate sustainability in plain language so all players - no matter what side of the pitching mound - are equipped with the knowledge and understanding to be an active and impactful player in the field of sustainability investing.

Let's touch base! Schedule a call at to explore your next play.

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