ESG investing: Momentum moves mainstream (2024)

FAQs

ESG investing: Momentum moves mainstream? ›

Past decade sees ESG move from margins to mainstream: Over the past decade, ESG considerations have transitioned from being on the fringes to becoming mainstream, with investors, companies, and stakeholders increasingly recognizing their material impact on financial performance and risk management.

2021 brings collective demand for change around the globe. ESG ranked as the top asset class for increased allocations in J.P. Morgan's U.S. Fixed Income Strategy client survey for 2021.

Sustainable investing has moved out of the niche and into the mainstream. In fact, it's so far into the mainstream that PwC Luxembourg's first European Sustainable Finance Series report predicts that the boundary between traditional and sustainable investments could all but disappear, especially in Europe.

The COVID-19 pandemic has reinforced the importance of ESG issues and accelerated the transition to a more inclusive capitalism. Investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty.

Negative/Exclusionary Screening

Through this technique, investors can choose to omit certain companies from their investment portfolio based on ESG criteria such as fossil fuel producers, tobacco manufacturers and weapon makers.

“They may also argue that considering ESG factors could conflict with a fiduciary's duty to act in the best financial interests of plan participants. Some opponents also believe that ESG investing is politically motivated and could lead to biased investment decisions.”

In 2004, the term “ESG” became official after its first mainstream appearance in a report titled, “Who Cares Wins.” The report illustrated how to integrate ESG factors into a company's operations, breaking down the concept into its three basic components: environmental, social and governance (or corporate governance).

The ESG industry helps highlight companies that may be riskier than traditional investing guidelines alone might suggest. Using an ESG lens could help investors find better, more profitable opportunities.

The future of sustainable investing is in the balance.It involves balancing financial and extra-financial considerations, balancing the short term and long term to ensure that short-term goals do not compromise long-term goals, and balancing stakeholder interests and seeking fair outcomes for all.

However, there are also some cons to ESG investing. First, ESG funds may carry higher-than-average expense ratios. This is because ESG investing requires more research and due diligence, which can be costly. Second, ESG investing can be subjective.

Does ESG investing outperform the market? ›

The bottom line is that ESG leaders tend to be more profitable and generate above-average returns, providing opportunities for more cash to be returned to shareholders over time. As seen in the performance chart, companies with higher ESG ratings outperformed those with lower ESG ratings.

We expect growth in ESG investing to continue through 2022, and well beyond. The shift to sustainable investing is so powerful because it's being driven by demand from the bottom up.

With a projected compound annual growth rate (CAGR) of 12.9%, ESG assets are on pace to constitute 21.5% of total global AuM in less than 5 years. It represents a dramatic and continuing shift in the asset and wealth management (AWM) industry according to PwC's Asset and Wealth Management Revolution 2022 report.

89 percent of investors consider ESG issues in some form as part of their investment approach, according to a 2022 study by asset management firm Capital Group.

Corporate engagement and shareholder action. As in 2016, the largest sustainable investment strategy globally is negative/exclusionary screening ($19.8 trillion), followed by ESG integration ($17.5 trillion) and corporate engagement/shareholder action ($9.8 trillion).

Bloomberg Media's Sustainable Future Study reveals where the sustainable investment landscape is headed next. ESG assets will hit $50 trillion by 2025, representing more than a third of the projected $140.5 trillion in total global assets under management, according to Bloomberg.

ESG investing is growing exponentially as more investors and issuers utilize ESG and climate data and tools to support their investment decision-making.

There is another reason the ESG and DEI bubbles are bursting: The economic case for them was never strong. Investors were promised ESG funds that would produce higher returns by avoiding certain investments, but they haven't always outperformed the market.