‘Invest sustainably’ is no longer just a moral appeal to investors, believes Stegeman. “This not only enables investors to contribute to the emergence of a sustainable economy; in the long run it also has a positive impact on their investment returns. Investors who do not adapt will ultimately short-change themselves.”

Stegeman predicts that investors who continue to invest as if nothing is the matter, will ultimately face disappointing or even negative returns. “Do you really want to continue to invest in yesterday's success stories?” 

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Investors who want to contribute to the radical change that is needed to achieve a sustainable economy, will need to make choices in their investment portfolios, says Stegeman. “For every investment you will need to ask yourself whether it really contributes to a more sustainable world. Many sustainable investors are happy if their sustainability scores and returns beat those of the benchmark. But that is not enough. A little less bad is simply no longer good enough.”

How can you invest in the transition to a sustainable economy?

Sustainable investing with positive impact as the main driver can also be a challenge for professional investors. When setting up a sustainable investment compass they generally follow the Sustainable Development Goals (SDGs) as defined by the United Nations. These sustainability and social goals must be reached by 2030. “We note that in doing so they often focus exclusively on the positive impact, in other words, to what extent they make a positive contribution to the SDG’s. That is of course important, but often the negative impact on other SDG’s is not taken into account”, says Stegeman. “While of course it is about the total impact of an investment.”

Stegeman argues that the choice for a specific investment may not always seem the most obvious one. Stegeman: “At Triodos the first principle for the selection process is that an investment must have a positive impact. During this process the focus is on companies that contribute to one of the seven transition themes. Step two is that companies must meet our strict sustainability criteria. This may sometimes result in investments that may on the face of it appear surprising. For instance, we invest in Toyota, which still manufactures a lot of combustion engines. But we nevertheless include the company in our portfolios because it has a credible sustainable strategy that, given the scale of the company, contributes to a substantial positive impact.”

Stegeman is also aware that the SDGs do not always provide a clear compass for investors. The goals may even conflict with each other. Stegeman: “It is important to recognise that tension. The SDGs are part of a policy agenda, not an investment agenda. It is therefore important to also adhere to your own impact goals. If that means deviating a little from the UN goals, so be it. As long as you can explain why.”

Look ahead, don't be guided by past returns

It is important to look ahead, says Stegeman, but many investors still base their decisions on past returns. “Data are often backward looking and don’t tell the whole story. You cannot base your decisions exclusively on data from the past. In the next 15 years returns will without a doubt be lower than they have been in the past.”

When selecting stocks, investors will need to pay more attention to risks that they have not faced before. Risks such as those related to the management of climate change and the transition to a sustainable economy. “Such risks will have a significant impact on returns. Currently, these factors are still considered as uncertain and are not incorporated in many return models” says Stegeman. 

Stegeman believes that if the COVID-19 crisis teaches us one thing, it is that there is added value in investing with attention for the impact on people and the environment. “It is also clear that we will need to downgrade our long-term return expectations. As for the risks, non-financial risks, such as this pandemic, will become increasingly important. This has consequences for the buffers that companies maintain and for how they organise their supply chains, for instance.” 

Finally, for impact investing, private parties will become increasingly important. Simply because governments are spending large amounts of money on controlling COVID-19 and will ultimately need to retrench again, argues Stegeman. His tip for sustainable investors: “Look at the companies in your investment portfolio. Are these really companies that will help create a sustainable world? For instance, we prefer Danone to Nestle, because the former is really aiming to become an organic company and that is also reflected in its products. So consider what you are investing in. Ok, that takes time, but remember that this where you are putting your money.”

This interview was originally published (in Dutch) on Fondsnieuws.

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