March 8th 2022

How ESG investment returns are growing as market evolves

How ESG investment returns are growing as market evolves

March 8th 2022

How ESG investment returns are growing as market evolves

Environmental, social, and governance (ESG) elements are increasingly influencing investing and have given rise to specialist funds and market behaviours

Investors acknowledge that resolving environmental issues is one of the decade's most difficult challenges. Hence, flows into ESG funds more than doubled between 2020 and 2021. 

Research performed for asset manager Fidelity analysed the performance of a variety of ESG investments around the world between 1970 and 2014 and discovered that half of them beat the market ― only 11% performed poorly.

According to BlackRock, the world's largest asset management firm, during the peak of the COVID-19 pandemic in 2020, more than eight out of ten sustainable investment funds outperformed non-ESG-based share portfolios.

This trend is expected to continue in the following years, according to a new analysis from Broadridge Financial Solutions which estimates that ESG assets would reach US$30tn by 2030. 

ESG investment growth fuelled by returns as much as worldview

Today's investors anticipate more in terms of return and returns. They expect that these funds will deliver a competitive return, and they want to ensure that businesses will live up to their promises.

So far, assessing the performance of these funds has been simpler than estimating the carbon dioxide emissions they are reducing. Morningstar discovered that ESG funds had lower volatility while delivering a good return on equity, as well as a longer lifespan: 77% of ESG funds that emerged 10 years ago have persisted, compared to 46% of conventional funds.

ESG and sustainable investing are projected to increase at a rapid pace in the future. By 2025, it is expected that around 33% of all global assets under management (not just local) would have ESG mandates.

Between 2018 and 2036, the industry is predicted to grow 43%, leading to significant global assets of US$160tnThe International Finance Corporation estimates almost US$23tn in investment opportunities in growing markets between now and 2030 as a result of the Paris Agreement, which was adopted in 2015.

The role of demand, data, and policy in seizing ESG investment and asset management

In recent years, the sector has been chastised for greenwashing, and investors have begun to seek more valuable insights into whether businesses were advancing ESG principles. 

Investors now demand specifics on how businesses are decreasing their carbon footprint and enhancing diverse and inclusive hiring procedures, for instance.

Policymakers are also working to ensure that ESG data disclosure is a necessity. The US Securities and Exchange Commission (SEC) is set to increase consultations on company disclosures such as carbon emissions and to examine money managers more frequently about their ESG categories.

The European Commission has also completed its Sustainable Finance Taxonomy, which establishes the standards that govern whether corporate activities can be branded as environmentally responsible.

Data will strive to advance real-time monitoring of a portfolio's ESG rating, allowing investors to make more wise decisions. Moreover, direct indexing could also enable large-scale customisation. 

In addition to all of the aforementioned things, there are also several ESG trends worth looking out for this year. 

These include: paying more attention to the social aspect and evaluating biodiversity impact.

In 2022, social problems such as equality and diversity, as well as labor rights, will remain at the center of the debate. The COVID-19 pandemic uncovered systemic problems in society in the business sector, particularly in how firms treat their employees.

Global biodiversity loss — the array of living creatures on the planet – is escalating. The consequences for livelihoods and the economy are just as significant as those of climate change. The wild animals' trade and the removal of large-scale habitats for agriculture or development can result in the establishment of novel zoonotic illnesses, with disastrous economic repercussions.

Although mandatory disclosure of biodiversity effects is still uncommon, several nations are now requiring investment companies to declare their corporate biodiversity impacts. 

In France, for instance, financial institutions are required to declare their biodiversity impact reduction strategy, which includes precise targets and a measure of compatibility with international biodiversity objectives. 

From January 1, The EU Sustainable Finance Disclosure Regulation requires investment corporations to disclose activities that have a negative impact on biodiversity-sensitive regions.

Investors will have greater rights and control over funds that promote the goals and values that are crucial to them, whether that is investing in women-run businesses, carbon-neutral businesses, firms that contribute in local communities, and so on.

Blaise Hope - Sustainability Magazine 5 March 2022



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