Robeco, The Investments Engineers

01-27-2022 · SI Dilemmas

SI Dilemma: Is ‘E’ or ‘S’ more important?

Sustainable investing has become mainstream, but it’s not a perfect science, with many challenges that practitioners must face. In the first of our new series of SI Dilemmas, Rachel Whittaker, Head of Sustainable Investing Research, outlines one of them – whether to put greater emphasis on the environmental or social factors.

Top keywords

The Sustainable Development Goals (SDGs) are described as “a shared blueprint for peace and prosperity for people and the planet”, placing humanity at the heart of the sustainable development. Social goals slightly outnumber environmental goals, as well as appearing earlier in the sequence. Yet sustainable investors could be forgiven for thinking that solving environmental issues is a higher priority than solving social issues.

The majority of SI funds still take a wide range of environmental, social and governance (ESG) issues into account. As the market for sustainable and impact investing has matured, environmental topics such as climate change, water scarcity, ocean health and biodiversity are now receiving a much higher share of investor attention compared to social issues such as human rights, workplace conditions and access to finance, education and healthcare.

For example, a quick search of one of the numerous databases of sustainable and ethical funds reveals a typical pattern: 12% focussed exclusively on environmental issues and just 3% exclusively on social issues.1 The pattern is not new – MSCI launched its first environment themed equity index in 2009 – but it was 2016 before an index focussed on social issues (the Women’s Leadership index) appeared in its ESG index family.2

Green bond issuance

In the bond market too, the first ‘official’ green bond was issued in 2008 (by the World Bank), with proceeds committed solely to environmental projects. The International Capital Markets Association (ICMA) introduced the green bond principles in early 2014. Although social bond guidelines followed just two years later, the volume of green bonds dwarfed that of social bonds until 2020, when social bond issuance finally took off (buoyed by the Covid-19 pandemic). Green bonds continue to make up the majority of assets in the combined green/social/sustainability bonds market.3

There are various theories for the popularity of environmental investments compared with social. It can be argued that environmental problems, such as emissions or water use, are easier to define and measure than social issues such as health or well-being. This makes it easier for sustainable investors to incorporate environmental data in a systematic way into their investment processes. It can also be easier to identify investable technical solutions for many environmental problems, while solutions to social problems may rely more on behavioural changes, and the definition of success can vary between different cultures. This makes the environmental factor a popular topic for thematic investors with an interest in product impact, particularly when there is a political support for green industries.

Pace of regulation

Yet, while we can argue that investors might be driven by the pursuit of returns, it is harder to make that argument for regulators. SI regulation has proceeded faster for environmental investing than for social. Despite the long history of SI focussing on a range of ESG issues, work on the EU Sustainable Taxonomy began in 2018 focusing almost exclusively on environmental issues, with social issues relegated to a brief mention of meeting minimum standards on human rights. Work on a Social Taxonomy finally began in 2021. Ongoing discussions about whether the taxonomies should be separate or combined illustrate that even the experts are struggling with the same question that all investors face – how to balance all of the issues competing for our attention?

Nevertheless, some social themes are quietly gaining momentum, even as environmental themes hog the limelight. Gender equality has been rising in importance over the last decade as an investment theme, from just five focussed public markets funds in 2012, to over 50 in 2019, and total assets under management of USD 11 billion by the end of 2020.4

Interconnectivity between E and S

Recently, the gender lens investing community has begun to look closer at the interconnectivity of gender equality with environmental challenges. Investors have been asking whether an investment or impact strategy focused on gender equality is truly meeting its goals if it does not also address the climate-related inequalities.5 The United Nations recognised the link between gender equality and climate change more than a decade ago.

Women and girls are often more vulnerable to the effects of climate change, as they form a large proportion of the world’s poor, and are more likely to be dependent on local natural resources that are impacted by climate change. They are less likely to be involved in decision making, have fewer financial resources to fall back on, are and more likely to be responsible for domestic needs such as clean water, food and fuel. All of these issues will be made more difficult by climate change, particularly in developing countries. However, the latter responsibilities also makes women critical participants in adopting the lifestyle changes necessary to adapt to a changing environment.6

Stay informed on Sustainable investing

Receive our Robeco newsletter and be the first one to get the latest insights.

Stay updated

Driving positive change

This interconnectivity between E and S exists across the entire scope of sustainability challenges. The worst effects of climate change will be disproportionately borne by the poorest in society; good health for all cannot be achieved without understanding that climate change and access to clean water affect patterns of disease. Likewise, eradicating hunger is inextricably linked with managing the impact of climate change and biodiversity on agricultural productivity. Trying to entirely disaggregate E and S issues and weigh up their relative importance could ultimately be a distraction from the goal of driving positive change and identifying attractive investment opportunities.

Examining our investment choices through a specific E or S lens can help investors to align with particular set of values or goals. But an effective investment or impact strategy must acknowledge that no sustainability challenge or opportunity can be tackled in isolation. Sustainable investors can also play a role in ensuring that an adequate focus on social challenges remains high on the agenda of companies, regulators and governments, through voting, engagement, and involvement in financial industry initiatives.

Related topics

share

Let's keep the conversation going

Keep track of fast-moving events in sustainable and quantitative investing, trends and credits with our newsletters.

Stay updated
Robeco

Robeco aims to enable its clients to achieve their financial and sustainability goals by providing superior investment returns and solutions.

Important information
The Robeco Capital Growth Funds have not been registered under the United States Investment Company Act of 1940, as amended, nor or the United States Securities Act of 1933, as amended. None of the shares may be offered or sold, directly or indirectly in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act of 1933, as amended (the “Securities Act”)). Furthermore, Robeco Institutional Asset Management B.V. (Robeco) does not provide investment advisory services, or hold itself out as providing investment advisory services, in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act).
This website is intended for use only by non-U.S. Persons outside of the United States (within the meaning of Regulation S promulgated under the Securities Act who are professional investors, or professional fiduciaries representing such non-U.S. Person investors. By clicking “I Agree” on our website disclaimer and accessing the information on this website, including any subdomain thereof, you are certifying and agreeing to the following: (i) you have read, understood and agree to this disclaimer, (ii) you have informed yourself of any applicable legal restrictions and represent that by accessing the information contained on this website, you are not in violation of, and will not be causing Robeco or any of its affiliated entities or issuers to violate, any applicable laws and, as a result, you are legally authorized to access such information on behalf of yourself and any underlying investment advisory client, (iii) you understand and acknowledge that certain information presented herein relates to securities that have not been registered under the Securities Act, and may be offered or sold only outside the United States and only to, or for the account or benefit of, non-U.S. Persons (within the meaning of Regulation S under the Securities Act), (iv) you are, or are a discretionary investment adviser representing, a non-U.S. Person (within the meaning of Regulation S under the Securities Act) located outside of the United States and (v) you are, or are a discretionary investment adviser representing, a professional non-retail investor.


Access to this website has been limited so that it shall not constitute directed selling efforts (as defined in Regulation S under the Securities Act) in the United States and so that it shall not be deemed to constitute Robeco holding itself out generally to the public in the U.S. as an investment adviser. Nothing contained herein constitutes an offer to sell securities or solicitation of an offer to purchase any securities in any jurisdiction. We reserve the right to deny access to any visitor, including, but not limited to, those visitors with IP addresses residing in the United States. This website has been carefully prepared by Robeco. The information contained in this publication is based upon sources of information believed to be reliable. Robeco is not answerable for the accuracy or completeness of the facts, opinions, expectations and results referred to therein. Whilst every care has been taken in the preparation of this website, we do not accept any responsibility for damage of any kind resulting from incorrect or incomplete information. This website is subject to change without notice. The value of the investments may fluctuate. Past performance is no guarantee of future results. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. For investment professional use only. Not for use by the general public.