Atis Krūmiņš, Head of Asset Management and Pensions in the Baltics of Luminor
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Atis Krūmiņš, “Latvijas Avīze”, JSC “Latvijas Mediji”
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The investment world is not far behind either – more and more investment managers are offering to invest in sustainable solutions, i.e. those that have a positive or minimal negative impact on the environment and society. Such investments are fast becoming the norm for several reasons.
First, the development of ambitious sustainable investments has been driven by rapid climate change that could no longer be ignored. The 2015 Paris climate agreement aims to limit global warming by setting concrete action steps. It is clear that in the coming years, more and more funding from the European Union and individual countries will flow into sectors that support sustainable change, and private investments in sustainable companies and fields will also become more and more popular.
Secondly, until a few years ago, financial market participants lacked a common understanding and comprehensible standards that would clearly determine what kind of business is or is not sustainable. During this time, various investment products emerged that claimed to be sustainable, but often were so in name only. In the coming years, investors will be able to scrutinize more closely whether companies are actually doing sustainable business, as companies will be increasingly required to disclose information about their impact on the climate and society.
Third, in the investment world, no investment is absolutely guaranteed to return, and it always involves risk. Investors’ thinking regarding sustainability risks has also changed in recent years. More and more participants in the financial market are setting not only the greatest possible profit from investments as an important criterion, but also a positive impact on the environment, and managing sustainability risks is becoming an important aspect in the choice of investments. Evaluating sustainability as one of the long-term investment risks, it becomes clear that sooner or later it will be reflected in the relationship between investment risk and return. These risks can affect business and, accordingly, investments in companies in at least two ways. First, there are the physical risks that threaten business as a result of climate change, such as the availability of water resources in certain regions of the world, extreme heat periods, or climate-induced disruptions in supply chains. Second, it can happen under the influence of administrative instruments, for example, companies without a clearly defined path to climate neutrality may have to pay higher taxes or suspend certain types of business, which may become prohibited or otherwise restricted. In addition, the availability of financing will also become increasingly limited for companies with poorly managed sustainability risks.
Finally, and fourthly, 2022 has been a challenge for sustainable investing, as the price of fossil energy and related assets rose significantly due to Russia’s invasion of Ukraine. Therefore, in the short term, energy independence prevails over sustainability in Europe. However, looking to the medium term, there is no doubt that the focus on sustainability will return and take over.
Sustainable investments already account for more than a third of total global assets under management, and this amount is growing every year. For example, in the USA, from 1995 to 2020, investments in sustainable companies increased 25 times. Bloomberg data shows that ESG assets have reached $35 trillion and will reach $50 trillion in 2025 if current trends continue.
It is clear that investor demand will determine supply. It is observed that people’s investment habits are also changing in recent years. According to the results of the 2021 survey by Morgan Stanley, more than 80% of investors are interested in sustainable investments and believe that their investments can have a positive impact on climate change and fighting global poverty. Accordingly, the more private investors will be interested in sustainable investments, the wider the offer of sustainable financial products from companies and asset managers will be.
* Head of “Luminor” Asset Management and Pensions Department in the Baltics
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