Incorporating sustainability factors into asset management

Abstract

This article analyses the reasons why an investor might be interested in investing in a sustainable asset. First, we observe that the rate of return required in the market is lower than that of other assets lacking the green label. This is shown to be the case even for assets with the same level of risk. Accordingly, it does not seem as though it can be attributed to climate-change risks being priced in by the market. However, the investor base for sustainable assets is shown to differ from that for conventional assets. It can therefore be argued that investors in these assets use a type of optimisation in which they incorporate a third factor (sustainability), in addition to minimising risk and maximising return, into the selection of their investment portfolios. Lastly, this article explores the various strategies that investors might adopt to incorporate the sustainability factor into their asset portfolios.