This paper provides evidence that sustainability trends affecting investments have evolved, with a growing number of investors considering material information on climate change, multi-stakeholder driven societies, resource degradation, demographic challenges, and technological revolutions.

Climate change

Climate change is now material and actionable for all investors, as is the related ongoing energy revolution that offers the potential to shift to a global low-carbon economy, and will have clear winners and losers. It exacerbates inequality since it disproportionately affects people of colour, lower-income communities, and developing countries. Understanding this can simplify strategic asset allocation and manager selection decisions, allowing investors an advantage. Carbon and location are now two new key dimensions to add to any discussion of risk.

Multi-stakeholder driven society

Companies have become the focus of increased attention and pressure from a variety of stakeholders, including consumers, employees, governments, and civil society. The increasing importance of environmental, social, and governance (ESG) issues to stakeholder groups suggests that companies must incorporate sustainability at the core of their business practice. The report shows that companies that pay equal attention to stakeholders and shareholders tend to outperform those which only focus their attention on the latter.

Resource degradation

Companies whose core activities use resources unsustainably are facing material risks, presenting opportunities for competitors promoting efficient growth. Trends such as the development of a circular economy, which minimises waste and makes the best of resources by recovering and recycling them, represent an opportunity for investment. Investors can fund technology supporting the transition from today’s linear economy (make, use, dispose) to an asset-light ‘circular economy’. Resource degradation is increasingly becoming a factor to consider in investment decisions, significantly as exploitable fishing stocks and land are declining, and water stress becomes more common worldwide.

Demographic challenges

Demographic changes such as rising life expectancy, ageing populations, and increasing urbanisation trends create both risks and opportunities for investors. Healthy, ageing consumers will have vastly different financial needs and resource requirements than today’s youth, spurring a demand for different products and services. City infrastructure will also require major planning and investment to accommodate rapidly increasing populations.

Technological revolution

Technological revolution has created significant investment opportunities, but investors must recognise that it also brings significant risks, particularly in terms of the pace of technological change and the nature of its innovative disruption. Advancements in areas such as precision medicine, artificial intelligence, and robotics present significant investment opportunities. Investors that recognise and incorporate these advancements will be better prepared for the future than their peers.

Investors who consider these factors when making investment decisions tend to outclass their peers. Cambridge Associates provides evidence that the increasing importance of ESG issues in stakeholder groups suggests that companies must incorporate sustainability at the core of their business practice. The Principal Investing department at Goldman Sachs Investment Partners (GSIP) illustrates how sectors with a sustainability focus generated 2.8 times more revenue growth than those that did not from 2015-2019.