How the taste for sustainability will affect investment flows

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A sustainability wave will remake economies and industries through capital reallocation, writes Brian Deese

05 August 2020 - 16:11The past year has seen a marked shift in society’s attitudes towards sustainability. This shift is spurring political pressure, a regulatory push and technological advancements to create the foundations of a more sustainable world, leading to a change in investor behaviour and setting in motion a major yet gradual capital reallocation.

The consequences could not just alter existing return drivers or risk premia, but create entirely new sources of premia. One commonly held view from a basic financial theory perspective argues that sustainable investing is not going to offer much return opportunity to investors. This view holds that today’s prices should fully reflect the predictable component of future flows into sustainable assets.

Our argument that flows will drive a “sustainability wave” is about much more than just the idea that today’s youth and their preferences affect market pricing. Though this contributes to the story as we discuss below, the sustainability wave and its market impact are about a broader shift in preferences spanning all generations and societies. The sustainability wave is not purely about demographics. But it provides a parallel.

A systematic means of building portfolios to reflect the inherent uncertainty applied to all future estimates.

 

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