ESG investing: A trend that is constantly evolving
The Global Investment Returns Yearbook looks at figures dating back to the year 1900. The long-term analysis aims to put in perspective bull and bear markets, financial crises, and investment trends. But what can it tell us about recent trends, such as ESG investing? The authors investigate if ESG-driven investments have their own reward in terms of higher returns and lower risk.
Financial markets have grown and changed enormously since 1900. So has our world and the challenges we are facing. Are they impactful enough to reshape the financial universe? Sustainability-oriented investors are already adapting their investment portfolios and the ESG (environment, social, governance) revolution is gathering pace.
ESG products expected to reach USD 40 trillion this year
In 2018, investment products linked to ESG criteria had a total value of USD 31 trillion, a 34 percent increase over two years. While the leading ESG-oriented region is Europe, the trend is growing faster in the US. We check if consideration of ESG data in investment approaches can pay and examine the performance of ESG funds and ESG indexes to see if there is a cost or benefit to ESG integration.
ESG investment products value
2016-2020
USD trillions
2016
USD trillions
2018
USD trillions
2020
(estimate)
Can ESG investing make a difference to your portfolio?
First, we have to differentiate the objective and approach defined for a sustainable investment strategy:
- Exclusions (for ethical reasons);
- ESG integration (favoring more sustainable firms based on a broad set of indicators);
- Strategy aiming at positive contributions to the UN Sustainable Development Goals besides financial returns.
Looking at companies directly, we have seen that addressing financially material ESG issues, such as good governance, properly defined and measured, matters and affects performance. Investing in intangibles such as reputation, trust, and good citizenship can add value for shareholders. However, improvements addressing environmental and social issues can require large investments.
What we have to keep in mind is that the ESG criteria are transforming and have already changed dramatically since the beginning of this century. Also, ESG indicators may have a limited lifespan, after which a criterion is no longer differentiating. This has been the case for corporate governance indicators, at least in developed markets.
New risks and opportunities require further research
Not so long ago, oblivious consumption was fueling the developed economies and markets. No one was asking about its cost and a long-term effect on societies or the environment, and consequently on the global economy.
Today, with the growing awareness of climate catastrophe, modified consumer preferences, and the regulators' impact, the course is changing, including in terms of investing. However, upcoming new risks and opportunities related to sustainability are yet to be fully covered by ESG research and data providers, and ESG investing has yet to play out.
