The Rise of Sustainable Investing
The ESG investing model is gaining traction as we look at data which supports the claim
The global focus of the private sector is shifting towards the collective societal well-being & preserving of the environment. These issues have taken center stage as we move towards achieving the UN goals of sustainable economic development, one where we not only take into account the importance of regular & manufactured capital but also care about the preservation and promotion the human & natural capital.
Sustainable investing, on the other hand, takes on a little broader approach taking into account environmental, social and governance (ESG) factors where financial return is generated while measuring the impact social & environmental impact. Social Stock exchanges (SSE) have been established in various parts of the globe to provide exposure to people to this kind of Socially Responsible Investing (SRI).
Institutional Investors seem to be at the forefront of embracing ESG investing, while individual investors are still sticking to the sidelines. A survey conducted by New York Life Investments pointed to a disconnect — while 38% of the individual investors showed an extreme interest in discussing ESG investing strategies with their financial advisors, only 20% of them got recommended an ESG strategy by their financial advisors.
Originally considered as a choice of a niche market segment, sustainable investing has grown exponentially in recent years. According to a recent report (Figure 1), total investments in sustainable assets has grown a whopping 38% from $8.7 trillion in 2016 to $12 trillion in 2018. In fact, the sustainable assets account for 25% of the total $46.6 trillion assets under professional management in the U.S.
It is a commonly held misconception that sustainable investment strategies underperform conventional strategies. In more than 2,000 studies analyzed by the academics in 2015, they found that 90% of the time, companies with strong ESG profiles produced equal or better returns.
Looking at the performance of the 100 most sustainable corporations since 2005, the Global 100 Index produced a better net investment return of 127.35% as compared to the 118.27% of MSCI All Country World Index (ACWI). It’s a testament to the fact that what is good for the world can also produce better financial performance.
Another myth held about sustainable investing is that it involves the screening of so-called “sin” stocks — Alcohol, Tobacco, Firearms & Casinos. While this exclusionary approach still plays a big role in modern investing, investment managers are increasingly incorporating ESG factors throughout the investment process. ESG integration strategies actually now total a whopping $17.5 trillion in assets (Figure 3) which has shown a 69% increase in the past two years alone.
Long term Potential
Many people still believe that sustainable investing will probably prove to be a passing fad. However, the data tells otherwise. According to the Morning star research (Figure 4), not only has the sustainable funds increased 50% from 235 in 2017 to 351 in 2018 but the net flows in ESG funds has grown impressively despite unfavorable market conditions — reaching $5.5 billion in 2018 & exhibiting strong growth in 2019.
The data also suggests the sustainable investing is not confined to any one segment of society. While Millennials are considered to be the most interested in Impact investing, men & women are equally likely to be motivated by sustainable values (Figure 5). Over half of the consumers surveyed showed value-driven tendencies who took one or more of the following actions to support sustainable investing practices.
- boycotted a brand
- sold shares of a company
- changed the type of products they used
As mentioned before, institutional investors were the biggest adopters of sustainable investing among all the groups, accounting for 75% ESG managed assets.
Choice of Investment
While the majority of sustainable investing is still focused on the equities, other asset classes are increasingly incorporating ESG analysis. Fixed income asset class now accounts for 36% of sustainable investments, with $580 billion in green bonds issued in 2018 alone (Figure 6). Apart from providing a fixed income opportunity, these green bonds have a beneficial environmental impact.
It is pretty evident, that the data negates some of the commonly held beliefs about the sustainable investing model. The ESG approach has moved past the buzzword stage to becoming an integral part of the investment portfolio of the modern investor — one who cares about the World.