Faced with the continuing cataclysm of climate change, both seasoned investors and new entrants are increasingly hounding funds with more sustainable stocks. They favor companies taking action to address the climate crisis and other environmental and social issues, such as resource conservation, biodiversity and human rights — rather than continuing to fund activities using fossil fuels.
The so-called investment in ESG (Environment, Society and Governance) has grown exponentially over the past few years and 2021 is no exception. Eco- and pandemic-friendly federal investments have helped boost momentum, showing the financial appeal of sustainable funds to investors, even those more focused on returns financial return rather than impact. While ESG growth is likely to continue, the pace of acceleration may depend on the government’s ability to entice investors into ESG through regulatory and legislative action.
Two types of investors, one direction
2021 is a record year for ESG, with a estimated 120 billion dollars poured into sustainability investments, more than double the $51 billion in 2020. As of this year, an estimated one-third of all assets contain sustainability investments. However, there has been tremendous growth over the years: the amount invested in ESG tenfold increase from 2018 to 2020, and 25 times more from 1995 to 2020.
While impressive, 2021 is not necessarily a standout year, Todd Cort, curator of the Yale Initiative on Sustainable Finance, who assesses that no particular benchmark has been achieved, but rather a continuation of a positive trend. That said, ESG funds have become less of a fringe category and sustainable stocks have seeped into traditional funds. “It’s hard to find any kind of fund these days that don’t consider climate risk in some way,” he said. “Perhaps it has come of age [in 2021] because the labeled ESG fund has ceded its information to the mainstream markets. ”
Part of the attraction is the resilience of ESG funds during the pandemic. They haven’t suffered as much as traditional funds during the initial recession, signaling their stability in times of crisis. “ESG factors tend to provide a greater benefit to downside risk than upside,” Cort said. He added that the pandemic is also an important lesson as we face the climate crisis, long thought to be a “chronic, economy-wide risk.” The pandemic shows we’re not ready for that kind of huge drag on the economy, which could cause people to turn to climate-friendly funds.
For that reason, even those who are not primarily motivated by social or environmental concerns will continue to invest sustainably. That matters, Cort says, because by far the majority of ESG investors have been driven by financial performance, rather than moral inclination. ESG funds have shown lower volatility and good returns on equity. Portfolio with ESG do better compared with those without the disease: 77% of those 10 years ago survived compared with 46% of others.
The second group of ESG investors are those considered real impact investors, willing to balance their financial returns with making a real impact. To be sure, there has been an increase in market participation by young people and the need to invest responsibly across generations. However, that group of investors is smaller than we thought — perhaps as low as 2% of total investors. “Yes, it is growing,” Cort said. “Does it increase as a percentage of assets under management? Very, very little. “In fact, millennials and Gen Z may not yet have the money to invest their value; so far, they are more active like cultural catalyst to urge big banks and institutional investors to join. However, as young people gain wealth, including intergenerational wealth variability, the rate of growth could accelerate further.
The role of government: Raising the iceberg
Government can also play a big role in the continued momentum of ESG, through both direct regulation and eco-friendly legislation. Cort offers an analogy of the iceberg: A small fraction of sustainable assets, with potentially meaningful impact, are “above the water,” meaning they are currently attractive to finance and investors alike. investment will promote these assets “no matter what”. However, there are still potentially lucrative prospects of an underwater ESG that are not yet visible or attractive to the mainstream. With its actions, the government can further elevate these from the depths of the investment pool to the surface, increasing the supply of attractive fodder for investors. “That’s where the government can really mess things up, or really do a great job,” he said.
There has been some modest iceberg movement this year. House Democrats introduced a bill requiring investment advisors to explain how they consider ESG factors in decision making. Meanwhile, the recently passed infrastructure bill has a lot of dollars dedicated to clean energy, environmental justice and reducing socioeconomic inequality; Cort says that public spending also serves as an incentive for individuals to invest in similar areas. In other words, a free market economist would argue that it distorts the market for those investments.
But, there is still room for more government action in the US. In April 2021, EU has passed its milestone The Corporate Sustainability Reporting Directive, which requires much stricter sustainability reporting, could prompt 49,000 European companies, including large private companies, to disclose sustainability information on 2023. Similarly, the US still takes a fairly liberal approach, leaving regulation to us institutional investors. While BlackRock is committed to increasing ESG assets from $90 billion to $1 trillion by the end of 2029, a lot of its so-called sustainable funds still invest in companies that use a lot of carbon.
A regulatory shift toward a more climate-unfriendly government, Cort said, could affect ESG’s dynamics, but is unlikely to do much more than “create speed bumps in the climate.” worst”, by loosening the rules on disclosure, which will make it more difficult to access company information. While that may hamper the pace, it cannot stop the positive trend towards ESG, given its now proven profitability.
That trend is obvious: 72% of adults in the US expressed interest in ESG; Some analysts forecast ESG in excess of 50 trillion dollars in the next two decades. And, Cort predicts that in the next 5 years, 100% of assets under management will incorporate some ESG element. “Because there’s no way it wouldn’t,” he said. “Climate change will impact everything.”
https://www.fastcompany.com/90706552/esg-investing-continued-to-soar-in-2021-the-government-could-boost-it-even-more?partner=feedburner&utm_source=feedburner&utm_medium=feed&utm_campaign=feedburner+fastcompany&utm_content=feedburner Investment in ESG has grown exponentially in 2021. Can the government push me