Will sustainability shift the investment trade-off for good?

by Josh Blundell, Head of Research and Operations

Every purchase decision we make involves trade-offs. Chips (yum) or salad (healthy)? Another coffee (caffeine hit) or top up the glass water (hydrated)?

We all navigate these trade-offs, driven by both conscious and subconscious factors – physical needs, desires, my willpower on a Monday morning in grey January – countless logical and illogical but all very human considerations and biases.

But they are also driven by information – and this applies also to society as a collective.

The recent scandal with diesel cars is a good example. Diesel – once heralded as more efficient for longer journeys and so a less polluting alternative to petrol – is now recognised as more damaging to the environment. The shift in purchase behaviour in the UK (driven by changes to incentivisation such as expansion of low emission zones in cities) has been dramatic – diesel accounted for 31% of new car registrations in the UK in 2018[1], down from a peak of 50% in 2016 and continuing its fall last year.

Better, more comprehensive information helps us make better, more informed trade-offs, both individually and as a social group.

In the world of investments – no matter how complex we try to make it – the core trade-off has always been relatively straight forward: risk vs return. Even today, all the research will tell you that by and large investors prioritise return over all other considerations.

But the information available to investors, our collective knowledge, is changing, no more clearly than in the sphere of sustainability.

We have never been more aware of the impact that our purchase decisions have on our environment and our society. 2020 is only a couple of weeks old but the terrifying images of the bushfires in Australia are beaming pictures of the deep impact of climate crisis onto our screens 24 hours a day.

So, as we embark on the UNs self-declared ‘decade of delivery’, we could be approaching a tipping point. Will end investors start to prioritise factors beyond risk and financial return? Will the long-term sustainability of our choices start to tip the balance in the investment trade-off, away from the purely financial?

This is one of the key questions The Wisdom Council will be looking to explore in 2020. You can find out more here.

[1] Vehicle Licensing Statistics: Annual 2018, Department for Transport