What's on the Agenda for Sustainable Investing in 2022?

Leslie Norton: After a big year for sustainable investing, what's next? Joining us to answer that question is Michael Jantzi, founder of the Morningstar company Sustainalytics, which provides Morningstar's globe sustainability ratings for your mutual funds and ETFs.

Michael, we saw nations acting to address climate change last year, inflows surge into sustainable mutual funds and ETFs. What key themes do you expect in 2022?

Michael Jantzi: Leslie, you mentioned climate change. I expect that climate change, which has been a catalyst for sustainability discussions over the last couple of years, will remain on the agenda. But I do think that climate change increasingly will be a catalyst for a broadening of the conversations across the sustainability spectrum. So, I was struck that at the COP26 conference in Glasgow last November, there were a lot more conversations about environmental issues, including biodiversity and deforestation and their link to climate change. It really hit me that climate-related weather events really do have a disproportionate impact, negatively so, on less developed economies and people who are less prepared or less resilient to take on the challenges of climate risk. And so that link to inequality is, I think, going to be increasingly on the agenda.

And I was also struck that at COP26, even issues of human health and their link to climate change were being talked about. And I do really expect that those conversations are going to continue, alongside climate as being a central theme.

Norton: Michael, net zero, or reducing emissions to net zero, is also a big organizing principle here. Why should investors care?

Jantzi: You're absolutely right, Leslie. Net zero is going to be on the agenda, which is obviously linked to climate change. I think from my perspective one of the important things to remember about net zero is it's not just a conversation about carbon emissions. From my perspective, we're talking about something here that's much more significant and profound. From my perspective, we're talking about that transition to a net-zero economy, which is really more akin to the next industrial revolution, from my perspective.

We're talking about a transition that is going to radically change our economic system. And so why should investors care? Well, the business models that underpin our economy are going to have to change. And I think through that net-zero transition, you're going to have winners, you're going to have survivors, and you're going to have casualties. So, of course, that presents risks and opportunities. And it really, for me, is an example why sustainability has moved from a nice tool to have in the investor toolbox, to really something that they need to be looking at.

So, where are the risks? Well, from my perspective, I think hydrocarbon-heavy industries and companies are going to have a rough go of it over the next 10 to 15 years. But at the same time, there's just tremendous opportunity. There's a lot of smart people already talking about the fact that the economic conditions for substitution of renewables are here. Wind, solar already being very price competitive with coal and gas, for example. And the opportunities we're going to see in electrification and innovations around green hydrogen and so on. There's just a lot of opportunities there. So when we have risk and we have opportunity, that means investors need to be looking at the net-zero transition as a central part of their investment thesis moving forward.

Norton: What other themes are going to shape the discussion, Michael?

Jantzi: Well, again, when I think about themes on the agenda, I really do look from that investor perspective. I think in 2022 and beyond, how investors are going to grapple with these changes, how are they going to address the risks in their portfolio, leverage the opportunities that we've seen, are going to really be some key themes. And what's interest to me is the approaches that investors are taking globally are reliving some of the old debates we've seen in the sustainable investing field.

For example, we've seen some investors in North America, across Europe saying, "Well, instead of engaging with companies on these transition, we're just simply going to make the decision to get out of these hydrocarbon-heavy industries." And so we've seen investors in the United States and in Netherlands, for example, be very transparent in saying, "Over the next several years, we're going to be divesting ourselves of fossil fuel producers," for example. Saying that the engagement efforts that we've had over time are not as effective. And so maybe they're looking to allocate that capital to other investment opportunities, but they're making those decisions within their fiduciary mandates to their plan members and unitholders and clients.

And then on the other hand, we've seen some really bold examples and success stories with investors that are looking to continue to engage with companies through this transition. Last year we saw CalSTRS working with Engine No. 1 in regards to making some changes on the Exxon board. What am I going to be looking for next year? Will those success stories continue? Will investors be able to have those positive impacts through their stewardship activities at scale.

So, for me, the trends are going to be a conversation about different approaches investors are going to take around this transition to avoid those risks, capture those opportunities. And it's not to me a question of either/or. There's lots of tools in the investor frame toolbox, and it'll be a question about how they leverage those to the best advantage of their clients.

Norton: Finally, sustainable investing is mostly a phenomenon for institutions, for pension funds and the like. Are individuals interested in sustainable investing?

Jantzi: Absolutely yes, is my answer to that question. I think our own research at Morningstar points to the increasing interest of individual investors in that retail and wealth audience. We've seen unprecedented high levels of assets flow into these sustainable funds over several years, quarter after quarter. I think that's going to continue. And one of the things that I think it's important for us to remember is this division between institutional and the individual investor. Well, let's remember that people are the plan members of pension plans. People, individual investors are a large client base for these asset and investment managers that we term institutional investors. So, there's a strong link between these two. But I think that interest is going to continue and, in fact, intensify with the individual investor because they care about the financial and the impact outcomes of their investment.

So, they see that institutional investors take account of sustainability factors because they believe it positions them for better long-term financial success, but individuals also are increasingly understanding that they can have a positive impact with their investment dollars, whether it comes to climate change, other environmental issues, social issues as well. I think the retail, that individual investor is very much going to be on the agenda in 2022 and forward.

Norton: Thank you so much, Michael. And that's all the time we have. Thank you for joining us. For more, please read Michael's latest quarterly letter, which you can find in the Sustainability Matters section of morningstar.com. And for Morningstar, I'm Leslie Norton.