Evaluating Sustainable Investment Trends for 2017 and beyond
February 08, 2017
In 2017, the world is in flux—Martina Macpherson from S&P DJI identifies a number of key developments that are likely to shape environmental, social, and governance (ESG) trends over the course of 2017.
These include:
The long-term shift to a low-carbon economy and physical natural capital risks;
Technological changes of unprecedented depth and speed;
A new global economic and geopolitical balance and the associated risk of division and polarization;
The emergence of the Sustainable Development Goals (SDGs), along with a new generation of (individual) market participants that is increasingly focused on social issues; and
A stronger institutional focus on long-term risks and opportunities that can affect economic, political, and societal development and growth.
Managing these transitions and the interconnected risks they entail will require long-term thinking, investment, and international cooperation.
At S&P Dow Jones Indices (S&P DJI), we have hence identified old and new ESG trends that will play out in 2017 and beyond—and influence our strategic decision-making.
E: Green finance will likely be supported across the investment value chain and bolstered by the Paris Agreement of 2016, in addition to natural capital risk and efficiencies management. In the lead up to COP 21 in 2015 and The Paris Agreement in 2016, market interest in environmental issues centered first and foremost on low-carbon strategies. While decarbonization and energy transition risks remain key areas of market participant interest globally, other environmental themes, in particular natural capital risk and efficiencies management, which encompasses all living aspects of nature and the ecosystem have gained ground and will likely remain a key area of focus for 2017 and beyond. Natural capital no longer remains just an abstract concept; it supports lives, livelihoods, and societal wellbeing, and it has infinite value for society and the economy, which is at risk.
S: In 2017, we can expect to see increasing interest in social themes among market participants across asset classes, along with a new mindset shift among institutions and individuals that can be described as movement from COP22 (“E”) to sustainable development goals (“E+S”) and the 2030 Agenda of the U.N. Sustainable Development Goals (2015)—and with a focus on investing with impact. This shift goes hand in hand with the debate around “business with purpose” and the emergence of a new type of “mixed economy” market participant that is increasingly concerned with investment outcomes and impacts beyond financial results.
G / Strategy: An increasing institutional focus on the long-term investment horizon and value creation will emerge, spearheaded by Focusing Capital on the Long Term’s newly formed NGO initiative. Short-termism (or “quarterly capitalism”) is defined as companies’ fixation on managing for the short term, with decisions driven by the need to meet quarterly earnings at the cost of long-term investment. At its worst, it has the potential to be problematic, but underinvestment can impede future economic growth, manifesting in low GDP growth, higher unemployment levels, and lower future investment returns for savers. Various market participants have begun to realize that one of the most effective ways to deal with short-termism is by changing the strategies and approaches of those who control the capital: the asset owners, as universal owners. Meanwhile, multiple bodies and initiatives, such as Corporate Citizenship’s report “How to Demonstrate the Value of Sustainable Business to Investors” (2016) supported by S&P DJI, have been assessing existing programs and calling for new systems to encourage integrated investment decision making, along with a reconsideration of accounting principles and reporting mechanisms that can drive long-term value creation. For 2017, we are expecting more alignment on defining and addressing risks and opportunities linked to long-term value creation, supported by products such as the S&P Long Term Value Creation Global Index (launched in 2016).
Martina Macpherson is Head of Sustainability Indices at S&P Dow Jones Indices. The blog was originally posted on S&P DJI’s Indexology website.
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