The TEXPERS Blog

Sustainable investing themes and trends for 2018

Graphic: iStock/Gustavo Frazao

Trends in climate change, resource scarcity, population changes, 

stewardship, diversity and social changes could point to 

investment opportunity.

By Mamadou-Abou Sarr
Guest Columnist

In 2018, investors can find opportunity through understanding the most interesting themes and trends we’re seeing in sustainable investing.

Climate Change
Climate has emerged as a dominant area of focus for investors globally. The global program for action was outlined in December 2015, when 195 countries and the European Union adopted the historic Paris Agreement. Still, critical policy developments, international coordination efforts, major technological innovations, and a major shift from brown to green investments lie further ahead.

Resource Scarcity

Water scarcity has become the second-largest consideration on the investment agenda after carbon emissions. It is one of the biggest risks to food and apparel industries, as well as to urban infrastructure. Cape Town in South Africa already is facing a water crisis, but a number of other cities, particularly in India and China and also the state of California are exposed to similar risks. We have seen improvement in corporate sustainable water usage and wastewater management. Further, a few high-profile green bonds have been issued to upgrade the water and sewer infrastructure.

Population Dynamics

Generation X and millennials have different priorities than their baby-boomer generation predecessors. They want their investments to align with their personal ethos. Of all population groups, millennials lead in terms of social-impact investing interest at 80 percent, with 28 percent actually making such investments, according to a U.S. Trust 2017 survey of high net-worth investors. Going forward, integrating sustainable investing solutions will likely be one of the top issues for plan sponsors.

Stewardship and Proxy Voting

We expect that 2018 will earmark a pivotal point in corporate-investor relationships. The growing interest of retail investors and beneficiaries on financial markets to sustainability is shifting the use of shareholder voting rights towards the support of sustainability-related resolutions. Shareholder-filed proposals on sustainability-related resolutions and targets and interactions between companies and their shareholders have increased dramatically during the last year.

Factor Investing and ESG

The FTSE-Russell investment managers’ survey from May 2017 stated that in Europe, 60 percent of managers anticipate applying environmental, social and governance investing criteria (ESG) to a smart-beta strategy targeting well documented compensated factors. According to the survey, only 20 percent of respondents from North America said they would consider it. At Northern Trust Asset Management, we have seen substantial interest in the factor-based ESG strategies in the United States, too, as evidenced by the impressive growth of assets under management in the NT Quality ESG strategy.

Diversity and Gender Equality

Companies in the top quartile for gender diversity on their executive teams were 15 percent more likely to experience above-average profitability than companies in the fourth quartile, according to McKinsey & Company research based on 2014 data. In McKinsey’s expanded 2017 data, covering more than 1,000 companies from 12 countries, this number rose to 21 percent. For ethnic and cultural diversity, the 2017 finding was a 33 percent likelihood of outperformance on earnings before interest and taxes. In response to growing demand, a number of stock indices have emerged that incorporate gender equality parameters into stock selection. These include the FTSE Russell’s newly launched series of “Women on Boards Leadership” indices, which re-weight companies with a target to achieve 33 percent female representation on the boards of constituent companies by 2020.

The views expressed do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Northern Trust Asset Management or TEXPERS.

About the Author

Mamadou-Abou Sarr is director of product development and sustainable investing at Northern Trust Asset Management. He is responsible for environmental, social and governance innovation and product development across the firm's full array of asset classes and capabilities for institutional and wealth management investors. Sarr has a key role within Northern Trust to proactively develop new ideas to ensure that ESG thinking remains central to the firm's business development.