By now we know that investors in sustainable equity funds are somewhat different from investors in traditional equity funds. For example, the sustainable funds with the highest ratings attracted inflows from investors at the height of the pandemic while conventional funds suffered heavy outflows. Investors in sustainable investments are also willing to pay more for these investment products even if they have somewhat lower returns. In short, the money invested in sustainable equities is stickier and more forgiving of short-term underperformance.
And that is a good thing, especially, if we think about saving for retirement and other long-term goals where one of the key problems for financial advisers is that their investors don’t always stick to their investment plans during the hard times of a recession or a bear market.
What sustainable investments provide investors is a form of expressive value as they call it in the literature. In plain English: Investors are proud to be invested in sustainable funds (or more so than in traditional funds) and can brag about their investments at the golf club.
I am normally not a fan of investments with bragging rights because most of the time these investments are often fashionable bubbly investments that don’t have particularly attractive long-term return prospects. Or they are outright fraudulent investments like the funds of Bernard Madoff. But as I said, I don’t think that sustainable investing is a fad or something that has necessarily lower returns than conventional equities.
And now, it seems I have come across another positive effect of sustainable investments. They seem to entice people to put more of their retirement nest egg into equities and thus create larger retirement nest eggs in the long run. A study of 913,000 French employees with investments in more than 6,500 pension funds showed that the introduction of sustainable funds as possible investments in pension funds in 2017 had some significant impact on the portfolios of the insured. On average across all employees, the equity allocation in their retirement savings rose from 12.1% to 14.2% a 17% relative increase. And lest you are surprised about the low level of equity allocations in French pension plans, welcome to the world outside the Anglo-Saxon equity investment culture. In countries like France, Germany, or Italy, these kinds of allocations are pretty normal.
But going back to the 2.1 percentage point increase in equity allocations, the study showed that this was almost entirely due to the increase in sustainable equity funds. The introduction of new traditional equity funds to a pension plan did not change the appetite for equities much, but when a sustainable option was introduced to the plan, the appetite for equity investments in the affected plans rose by 7.2%. And when you save for thirty to forty years in your pension plan, that makes a huge difference in the size of your nest egg.
Ironically, in the United States, the country of equity worship, the Department of Labor has introduced new rules that prevent pension plans from considering anything but financial criteria when selecting investment options. And while there are reasonable objections to some ESG investments as misleading and effectively greenwashed, the new rule may lead to worse outcomes for the insured because they simply don’t invest as much in these plans as they otherwise would.
I do not pretend I understand enough about equity markets, but if pension plans outside the USA are creating a non-trivial uptick in demand, and if your momentum premia notion from the other article is correct, then it might eventually push USA pension plans to allocate more and more to these ESG investments (not exactly a Madoff Ponzi scheme, but it kinda behaves like that from where I sit). Furthermore, if actual removal or decrease of subsidy to traditional fuel happens (during Biden?) in the USA, even value investing for certain power/energy/utilities would quickly swap with "green" energy no? Even now I think the tax breaks (in the USA) are being reverted back higher for those investing in solar power.
But what is truly investable?
If I put on my engineering hat, the actual efficiencies are still uncomparable between fossil fuel and current alternative technologies. But with a subsidy, these alternatives will financially be more viable. But then the wholistic end-to-end view on waste and related effects on the ecosystem (e.g. worn-out batteries anyone?), what are we really doing?
There are actual solutions today that reduce harmful emissions and truly provide an incremental positive effect - except they are not sexy, or at least they are not being promoted as sexy.
"Attractive" investment is somehow equated to soundbites (or twitter feed) where perhaps a popular personality might vilify one particular target and the masses of uneducated followers take it as gospel because the masses do not even understand the different aspects of power - supply, storage, transmission, distribution - especially in the context of the WHOLE planet. But a lot of influencers, from the government to the financial advisors touting these "sustainable investments" are a) not educated enough or b) maybe they know, they just do not believe they will be alive long enough to suffer the effects of their folly (is this why the pricing of carbon credits are being manipulated despite we are already in the 2020s)?
Are humans really just a lucky collection of dumb carbon atoms that will eventually end up in maximal entropy despite our belief we are "intelligent" beings?
What do you think?