The Growth of Sustainable Investing
It’s no secret that over time, interest in sustainable investing has grown. Total assets held in sustainable investments have multiplied 25-fold since 1995. With positive quarterly cash inflows into sustainable funds in 31 of the previous 32 quarters, this increase has been remarkably stable over time. Since the third quarter of 2015, more money has gone into sustainable investment opportunities than it has left.
According to the United States Forum for Sustainable and Responsible Investment’s 2020 Trends Report, the total value of sustainable investment assets under management has increased by 42% from 2018 to $17.1 trillion. As the number of property funds, REITS, hedge fund assets, and overall investment vehicles have all increased over time, alternative investment vehicles for sustainable investing have increased across the board.
What is sustainable investment
Sustainable investing, also known as socially responsible investing or ESG investing, is a type of investing where a person makes an investment after giving careful thought to environmental, social, and corporate governance (ESG) aspects. The objective is to employ investment funds whenever possible to support long-term financial success, business accountability, and beneficial society impact.
Sustainable investing makes ensuring that businesses are evaluated for their contributions to society as a whole rather than only for their short-term financial success.
Investment Success
Assets in ESG have outperformed their comparable investments, which is one of the key drivers of growth in sustainable investing. ESG companies’ stock performance has lower volatility than that of their peers by 28.67 percent while also increasing equity return by 6.12 percent. This was true for each of the 12 industries examined, including the ones for materials, energy, food, and beverage, and transportation.
Farmland is one example of an illiquid real asset that has produced larger returns than conventional investments with substantially lower volatility. Farmland investments have outperformed bonds over the past 25 years in terms of risk-adjusted return. The effectiveness of real assets as an inflation hedge has also been demonstrated. Due to an increase in the average household’s expenditure on food, an increase in agricultural prices often fuels inflationary economic trends. As a result, investments in farms have typically generated returns that are higher than the CPI average. Investments in farmland have a higher correlation with inflation than investments in stocks, gold, or government bonds.
Investor Demand
Demand from institutional and ordinary investors seeking to invest in ESG assets has been rising. With an additional 15% of asset owners actively exploring investing in the sector, sustainable investing is being adopted by 80% of asset owners. Millennials may have formerly dominated sustainable investing, but new data reveals that the statistical gap between age groups’ preferences for ESG investing has shrunk. In a Morningstar survey, 72% of all American people surveyed said they were at least somewhat interested in sustainable investment. Primarily 11 percent of individuals said they would prefer to concentrate only on bigger returns, whereas 21% of those polled expressed a strong interest in ESG investing.
The mindset of retail investors toward sustainable investments has been evolving. In their portfolio decisions, 74% of financial advisors said their clients were devoted to social and environmental reasons. Only 30% of financial advisors responded to the same poll conducted two years prior with the same conclusion. Institutional investors are equally as eager in participating in sustainable investment possibilities, if not more so. In the fourth quarter of 2020 alone, institutional equity of over $3.4 billion was invested in sustainable open-end funds or ETFs.
Examples of Sustainable Investment
Environmental: Green building/smart growth, climate change/carbon, clean technology, pollution toxics, sustainable natural resources/agriculture, water use, and conservation
Corporate governance: Corporate political contributions, executive compensation, board diversity, anti-corruption polices, and board independence
Social: Human rights, avoidance of tobacco or other harmful products, community development, diversity & anti-bias issues, workplace benefits, labour relations, and workplace safety
4 Types of ESG Strategies for Investors
1. ESG Integration
“I want to integrate ESG factors and traditional factors to assess the risk/reward profile of my investment.”
For example, using an ESG integration approach, a company’s water usage and toxic emissions would be assessed against financial factors to analyze any future risks or investment opportunities.
2. Exclusionary Investing
“I want to screen out controversial companies or sectors that do not meet my sustainability criteria.”
Using an exclusionary investing approach, an investor may screen out companies whose revenues are from tobacco, gambling, or fossil fuels.
Related ESG Terms: Negative Screening, Negative Selection, Socially Responsible Investing (SRI)
3. Inclusionary Investing
“I want to seek out companies that are ranked highly in their sector based on sustainability criteria.”
With an inclusionary approach, a fund may include the leading companies in a sector, relative to their peers, such as the top performing tech companies in ESG.
Related ESG Terms: Positive Screening, Positive Selection, Best-In-Class, Positive Tilt, Thematic Investing
4. Impact Investing
“I want to invest in companies that attempt to deliver a measurable social and/or environmental impact alongside financial returns.”
Lastly, impact investing approaches may focus specifically on renewable energy companies that have the intent to make a positive environmental impact.
Related ESG Terms: Goal-Based Investing, Thematic Investing
Public Policy and Legalisation
Law-making will only promote the growth of sustainable investing. To enable fiduciaries to take ESG factors into account when suggesting investment strategies, Senate Democrats submitted an amendment to the Employee Retirement Income Security Act. To force large asset investment advisors to identify the ESG aspects taken into account when making investment decisions, House Democrats presented the Sustainable Investment Policies Act. The Retirees Sustainable Investment Opportunities Act gives ERISA-governed plans the authority to specify how their investments will address sustainable investing issues, such as the effects of climate change.
Additionally, this pattern is highly known throughout the world. Six nations—Denmark, France, Hungary, New Zealand, Sweden, and the United Kingdom—have made carbon neutral targets part of their national legislation; another 24 nations, including the United States, have made carbon neutral targets part of their national policies. 132 nations worldwide have taken some action to become carbon neutral by 2050. The prospects and demand for sustainable investment opportunities will only grow as a result of additional regulation and environmental awareness.
Is ESG the same as sustainable investing?
To simply put, no. ESG is about making portfolios “less bad.” A sustainable portfolio is about intentionally including companies that are making a positive difference in the world.
According to Morningstar, there are currently 502 different mutual funds and ETFs available in the US that are designated as ESG/Sustainable. I have found that very few actually offer positive, solutions-based holdings. The vast majority are just “less bad” versions of the S&P 500 or some other arbitrary index. It takes a significant amount of rigor and due diligence to identify and sort through the greenwashing to find a fund that truly meets the SRI investment designation.
In Conclusion
Future predictions indicate that ESG and sustainable investing will continue to increase significantly. ESG mandates are anticipated to apply to about 33% of all managed assets worldwide (not just domestic) by 2025. Between 2018 and 2036, the sector is anticipated to grow by 433%, resulting in $160 trillion in total worldwide assets. The International Finance Corporation projects that between now and 2030, there will be approximately $23 trillion in investment potential in emerging nations as a result of the Paris Agreement, which was ratified in 2015.
Institutional investors are mostly responsible for this expansion. The largest asset manager in Europe, Amundi, declared that by the end of 2021, ESG would be included into every investment it made. The largest asset manager in the world, Blackrock, has pledged to boost its sustainable assets from $90 billion in 2019 to $1 trillion by the end of 2029. According to 83% of institutional investors in Europe, sustainable investing has gained importance.
sustainable investing, but new data reveals that the statistical gap between age groups’ preferences for ESG investing has shrunk. In a Morningstar survey, 72% of all American people surveyed said they were at least somewhat interested in sustainable investment. Primarily 11 percent of individuals said they would prefer to concentrate only on bigger returns, whereas 21% of those polled expressed a strong interest in ESG investing.The mindset of retail investors toward sustainable investments has been evolving. In their portfolio decisions, 74% of financial advisors said their clients were devoted to social and environmental reasons. Only 30% of financial advisors responded to the same poll conducted two years prior with the same conclusion. Institutional investors are equally as eager in participating in sustainable investment possibilities, if not more so. In the fourth quarter of 2020 alone, institutional equity of over $3.4 billion was invested in sustainable open-end funds or ETFs.Examples of Sustainable InvestmentEnvironmental: Green building/smart growth, climate change/carbon, clean technology, pollution toxics, sustainable natural resources/agriculture, water use, and conservationCorporate governance: Corporate political contributions, executive compensation, board diversity, anti-corruption polices, and board independenceSocial: Human rights, avoidance of tobacco or other harmful products, community development, diversity & anti-bias issues, workplace benefits, labour relations, and workplace safety4 Types of ESG Strategies for Investors1. ESG Integration“I want to integrate ESG factors and traditional factors to assess the risk/reward profile of my investment.”For example, using an ESG integration approach, a company’s water usage and toxic emissions would be assessed against financial factors to analyze any future risks or investment opportunities.2. Exclusionary Investing“I want to screen out controversial companies or sectors that do not meet my sustainability criteria.”Using an exclusionary investing approach, an investor may screen out companies whose revenues are from tobacco, gambling, or fossil fuels.Related ESG Terms:Negative Screening, Negative Selection, Socially Responsible Investing (SRI)3. Inclusionary Investing“I want to seek out companies that are ranked highly in their sector based on sustainability criteria.”With an inclusionary approach, a fund may include the leading companies in a sector, relative to their peers, such as the top performing tech companies in ESG.