What is sustainable investing? It is an approach to investing that balances profits with environmental, social and governance factors (ESG). Sustainable investing becomes increasingly popular among wealth managers and their clients, but… will it become the future of wealth management? In this article, we explore this pressing question.
What Is Sustainable Investing?
Sustainable investing is strictly related to ESG in wealth management. It is an approach in which you add three extra factors to determine which assets to obtain and how to invest a client’s wealth, namely:
- environmental,
- social,
- governance.
It is a long-known approach that takes different names, though the most popular currently is ESG investing. Sustainable investing may also be called:
- ethical investing,
- socially responsible investing,
- green investing,
- impact investing.
The Benefits of Sustainable Investing
Sustainable investing has multiple benefits which makes it attractive to both those concerned with the ESG principles and those looking at investments purely from the financial point of view.
What are the key advantages of investing in sustainable assets? Namely:
- Lower risk—searching for sustainable investments means being more thorough, hence selecting assets that are less likely to be hit by, for instance, shifting legal regulations.
- Higher profits—as Morningstar claims, sustainable investments often yield higher returns than their traditional counterparts. [1]
- PR and talent retention—many people are concerned about sustainability in general and evaluate it in their careers and lives. With sustainable investing, you can improve your general PR and even retain (or acquire) more talents for your businesses from those exceptionally skilled wealth managers who are indeed concerned with the environment.
- Innovation—sustainable assets (namely, businesses) usually use more innovative technologies and are pioneers in their respective fields. This means that they have a higher potential to grow rapidly in the future.
Is Sustainable Investing the Future of Wealth Management?
In our opinion: yes, sustainable investing will play a major role in the future of wealth management. This is supported by several indicators that we can already observe.
Forecasts Predict Sustainable Investing to Dominate the Market
According to Deutsche Bank Research, sustainable investments should constitute about 95% of total assets under management by the year 2030 and reach over 100 trillion USD. [2] A study from two years later is less positive — it estimates that sustainable investments will reach about 30 trillion USD by the end of 2030. [3] Nevertheless, what both forecasts show is that the number and value of such investments will be growing steadily.
Forecasts show that sustainable investing will become a major part of the market and gain importance in the future. Thus, even though we cannot estimate when (or whether) it will truly phase out other investments, we are sure that it will be crucial in the future of wealth management.
Sustainable Investing Is a Major Trend
If you search for current trends in wealth management, you’ll find many articles that at least mention ESG investing, sustainable investing, or any of the synonyms. This publicity is quite crucial.
Wealth managers (and their clients) searching for the most up-to-date information are bound to stumble upon information about sustainable investing. Therefore, they will become increasingly interested in them, stimulating the development of this approach and related strategies. This might not be the strongest argument for why sustainable investing will become the future of wealth management, but it is a viable one and adds up to the reasons why we believe that this trend will remain strong.
Sustainable Investing Offers Multiple Benefits
As mentioned in the previous section, sustainable investing offers a number of benefits. It is often better than the traditional approach, meaning that more and more parties will turn to it just for the sake of the potential profits.
After all, with countries introducing new sustainability-related legislation constantly, the geopolitical turmoils in the Middle East and Eastern Europe, and inflation wreaking havoc on the most critical markets, sustainable investments emerge as a safer option. An opportunity to survive the market slow down, a less-risky way to multiply one’s wealth. Experts see that hence, they will pursue ESG investments, at least for as long as they are more profitable.
More People Are Environmentally Aware
Finally, we can see the general level of environmental (and social) awareness in society, especially among the young generation. This will, in turn, result in younger investors being more inclined to invest their wealth in sustainable assets.
This is especially crucial as we undergo the Great Wealth Transfer. As the older generations pass on their wealth, the younger ones have more to say, and according to Stanford Business (via Matter x Performativ), they want sustainability reflected in their investments—there are almost twice as many Millenials/Gen Z representatives as Baby Boomers who underline that. [4] What is interesting is that in this study, they claimed that they prefer such investments even if they could potentially yield lower returns.
The Takeaway
Undoubtedly, sustainable investing is the future of wealth management. It is becoming an increasingly popular option, so the question isn’t whether it will become a critical part of the market but rather when it will happen.
You might also read: ESG Investing Greenwashing: What Does It Mean?
References:
- Bioy, H. (2020, June 16). Do sustainable funds beat their rivals? Morningstar. https://www.morningstar.co.uk/uk/news/203214/do-sustainable-funds-beat-their-rivals.aspx
- Deutsche Bank Research. (2019, September). Climate change and corporates: Past the tipping point with customers and stock markets. Deutsche Bank.
- Broadridge Financial Solutions. (2021, April 13). ESG investments poised to reach $30 trillion by 2030. Broadridge. https://www.broadridge.com/press-release/2021/esg-investments-poised-to-reach-30-trillion-dollar-by-2030
- Weiss, M., & Samson, M. (2024, August 9). A generational shift towards sustainable investing: A catalyst for innovative investment solutions. This Is Matter. https://www.thisismatter.com/insights/a-generational-shift-towards-sustainable-investing
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