Climate Action

9 Sustainable Investing Themes for 2019

These themes and trends can lead to the best opportunities in sustainable investing this year.

  • 18 April 2019
  • Mamadou-Abou Sarr

Investors who want to allocate more sustainable and ESG (environmental, social and governance) investing strategies into their portfolios face an increasing number of options as opportunities widen and sophistication deepens. To help sort through those options, here are some of the most important themes we see in 2019.

#1 The Carbon Emissions Trend Reversed

In a setback for efforts to curb global warming, global carbon emissions increased in 2018 — the first time since 2014. This not only reflects economic expansion, but a lack of climate action globally. Asset managers and owners have come together to develop investment solutions and engage with the largest carbon emitting companies, and we expect this to continue in 2019. We are working with asset owners to develop investment solutions that will capture opportunities as the technological and regulatory landscape evolves.

#2 Resource Shortages

Water is the natural resource most susceptible to overutilization and waste, and more extreme weather linked to climate change further exacerbates the shortage. From an investment standpoint, this could increase input costs and potentially reduce profit for companies across sectors. From 1997 to 2018, the Water and Sanitation component of the U.S. Consumer Price Index increased at two times the rate of the overall CPI (4.3% versus 2.15%).* However, resource shortages go beyond water, as climate change also may lead to shortages and higher costs for productive land and forestry products. We incorporate shortages of water and other resources as part of our quantitative investment process (including in our best-in-class** strategies), favoring more efficient companies.

#3 The Younger Generations

Successful active engagement leads to gradual shifts by energy companies in investment and business models because of climate risks and opportunities. As Millennials accumulate wealth, we think financial markets, asset managers and companies will follow their investment preferences. For younger generations, the question with sustainable investing is “Why not?” rather than “Why?” as almost 75% of affluent Millennial and Generation X charitable donors have made some sort of social impact investment.^ We have developed strategies that incorporate the values of younger generations while maintaining a strong investment thesis.

#4 Better Corporate Disclosure

We have seen significant progress in the amount and quality of corporate disclosures on sustainability topics, but there still are gaps between available data and what investors need. We think investors will push companies for additional disclosure of relevant metrics as well as how they are incorporating sustainability risks into the business plans. In our investment process for our best-in-class and quantitative strategies, we favor companies who are transparent and appropriately manage risk.

#5 Active Ownership

In 2018, we saw new forms of collective engagement across investment managers and asset owners. The Climate Action 100+ Initiative, in which we participate, launched in December 2017 and shaped the agenda and the progress of climate-related engagements and voting in its first year. Successful active engagement leads to gradual shifts by energy companies in investment and business models because of climate risks and opportunities. We have formal proxy voting and engagement policies, which are designed to foster strong governance with robust risk management practices and transparency.

#6 Greener Strategies

Over recent years, renewable energy and other clean technologies have grown impressively in terms of both physical volumes and investments. As a result of the technological changes and governmental regulations, investors and companies are moving towards greener revenue streams to benefit from the transition to the lower carbon economy. We have incorporated various carbon reduction and greening techniques into our portfolios, which are designed to invest in companies further into the transition.

# 7 Global Sustainable Development Goals

The 17 Sustainable Development Goals developed by the United Nations in 2015 will be a driver of sustainable economic growth in the long-term as companies seek to elevate the standard of living for the global population by 2030. Companies have started to align and measure their operations and output with the goals to demonstrate how they are participating in sustainable global advancement. Investors will gain a stronger understanding of the opportunities arising from alignment. Northern Trust Asset Management believes our ESG best-in-class solutions are, to a large degree, aligned with the investable sustainable development goals and we continue to incorporate these themes into our ESG suite.

#8 ESG Across Asset Classes

Equity has historically been the primary asset class for sustainable investments. In the past two years, however, net new flows to ESG bond products surpassed €10 billion annually.^^ Institutional investors increasingly realized that they can apply ESG factors to not just part of their portfolios, but across assets. Fixed income’s role as a risk control asset argues for even greater applicability of ESG risk screening, with mounting evidence of relevance. We have found that historically during periods of credit stress, highly-rated ESG issuers outperformed their low-rated counterparts and we offer a number of sustainable fixed income strategies with controls over critical risk and return parameters.

#9 Pairing Factor and Sustainable Investing

As company data becomes more granular, quantitative investors have been able to analyze large-cap developed market companies from a sustainability standpoint for almost a decade. Increasingly sophisticated quantitative tools allow greater control in incorporating ESG alongside other risk factors. Using only ESG as a stock selection method is not an optimal way to build a portfolio in order to achieve competitive returns, but it adds an important risk management lens. We have developed factor-based ESG solutions across the equity and fixed income space, which demonstrate that ESG analytics and factor investing can be successfully combined in the same portfolio.

Learn more about sustainable investing at Northern Trust Asset Management.


*U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: Water and sewer and trash collection services [CUUR0000SEHG], retrieved from FRED, Federal Reserve Bank of St. Louis. U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items [CPIAUCSL], retrieved from FRED, Federal Reserve Bank of St. Louis 2018

**Best-in-class ESG is industry terminology referring to an investment approach that selects companies that are leaders in implementing ESG.

^Fidelity Charitable, “Impact Investing: At a Tipping Point?,” 2018

^^Cerulli Edge Series. November 2018


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