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Whats driving ESG momentum?

Most investors will agree that the main objective of investing is to optimize your investment performance for the level of risk you are prepared to accept. However, more and more investors are also realising that the investment equation is becoming more sophisticated than a simple risk versus reward comparison. In particular, there’s a growing awareness of the value to be gained by incorporating ESG data into investment analysis and process.

Recent evidence shows that ESG data helps investors mitigate against knowable risks, and has become core to best risk management practice. Further to this, some investors are utilising ESG data to identify businesses which will benefit from societal change looking forward.

As a result, it’s no surprise that the ESG investment sector has been gaining momentum for some time, and 2020 is seeing an escalation of that trend. A recent Deloittes Insights study showed that ESG assets compounded at 16% p.a. between 2014 and 2018, and now account for 25% of total market assets. Many forecasters believe this momentum will continue in the coming years with a 50% market share an achievable goal.

The key drivers of this growing ESG momentum are compelling:

  1. More and more of the world’s largest fund managers are signing the Principles for Responsible Investment (PRI). There are now 3,108 PRI signatories whom manage $US103 trillion in assets. The PRIs are focused primarily upon integrating ESG issues into investment analysis and decision making processes, so this fast growing segment of the fund management industry is driving ESG focused investment forward. Further growth in PRI signatories appears likely which would in turn drive further ESG asset growth.
  2. Post-coronavirus stimulus is focused upon companies with a sustainable future. One of the positive aspects of the coronavirus crisis is that it has forced central banks and Governments to think about long term sustainability at a time when many old school models and systems are being shown to have a limited shelf life. As such, there’s a growing awareness that supporting climate friendly industries will help build resilience at a time when resilience is needed more than ever. This shift was confirmed by a recent survey of G-20 officials and central bankers which showed strong support for green projects and investments. And the European Green Deal showcases the importance of climate focused initiatives looking forward, whilst a quarter of planned EU spend is earmarked for climate friendly projects.
  3. The coronavirus crisis has also highlighted the importance of ESG issues at a human level and these issues are being prioritized in a way they weren’t before the crisis.
  4. Mandatory regulatory disclosures are increasingly integrating ESG. There has been a seismic shift in the world of European financial regulation in recent years with growing ESG disclosure requirements forcing ESG onto the mainstream financial compliance agenda (see below)
    Based upon previous global regulatory developments, it’s likely that the rest of the world will follow the European developments over time. And the greater the growth in global sustainable finance regulatory requirements, the greater the likely growth in ESG assets under management looking forward.
  5. New frameworks are evolving which allow better investment management and understanding. The UN’s Sustainable Development Goals have been front and centre in the investment world for a number of years, and have arguably helped lead to the development of new frameworks focused upon improving investor management and understanding. For example, the SASB Materiality Map can be used to identify and measure environmental risks including GHG emissions, air quality, energy management, water and wastewater management, waste and hazardous materials management and ecological impacts. All of these risks are major investment risks so this is valuable investment information. More frameworks are likely to emerge which will further compound the ESG asset growth opportunity.
  6. Millennial investors are more focused upon sustainable investors than other age demographics. The data is compelling:
Mandatory regulatory disclosures are increasingly integrating ESG
“Corporate management of issues such as human rights, employee well-being, and community relations are under scrutiny, as issues that were considered luxuries in the past (e.g., flexible working models) have become critical business continuity mechanisms in the pandemic lock down and help to maintain public health, social justice, and economic stability.” UBS, Sustainable investing after Covid-19
MSCI – Swipe to invest: The story behind millennials and ESG investing, March 2020

Millennials’ passion for sustainable investing has huge long term implications, as this demographic will become the dominant manager of investment assets in the coming years. And it is worth remembering that this demographic will also inherit the baby-boomers’ wealth in the not too distant future. Their opinion matters.

“We’re in the middle of a $30 trillion intergenerational wealth transfer from baby boomers to their children. And those kids—not really millennials only, but people from 25 to 40 years old – simply think about their investment decisions differently.” Dave Nadig,

It’s clear that the recent momentum in ESG investment strategies is built upon solid foundations which are here to stay, and will arguably escalate in a post-coronavirus world. There’s been a shift towards higher investor consciousness, and the outlook for ESG focused sustainable investing is brighter than ever. In this environment, demand for high quality ESG data is likely to escalate as it continues to open up a new dimension of value creation for investors.