The focus of both individual and institutional investment portfolios has shifted in recent years, with greater emphasis being placed on the environmental, social and governance (ESG) stance of companies. This signals the rise in responsible investing where profits are no longer put before the planet and the well-being of its inhabitants.
According to a report by Bloomberg Intelligence, global ESG assets could surpass $50 trillion by 2025, accounting for as much as one-third of the projected total assets under management globally. As investors continue to place their money into more sustainable business models, this article seeks to uncover some of the reasons behind this growing trend.
Influence of Younger Generations
Much of the growth in ESG-investing is being spurred on by younger generations of millennials and Gen Z who are socially and environmentally conscious and concerned with building a better future.
This generational shift is highlighted by an in-depth survey carried out by asset management firm Amundi in collaboration with the Business Times which found that 82% of young millennials surveyed between the ages of 25 and 34 were ‘engaged’ ESG investors. This figure rose to 93% of Gen Z people who were aged between 21 and 24 years old, making them the highest amongst all age groups. With ESG matters being of such strong concern to the younger generations, investment in these areas is only set to grow.
Mitigation of Risks
Failure to take adequate notice of ESG factors can come with considerable risks for investors. Aside from the negative perception in the eyes of the public which can do untold reputational damage to a business’s brand and share price, the increasing regulatory burden associated with ESG factors can become crippling.
Companies have various ESG management and reporting requirements to which they must adhere including those mandated by the Task Force for Climate-related Financial Disclosures (TCFD), the Sustainable Accounting Standards Board (SASB), and the Global Reporting Initiative (GRI). Investors use these reports to track benchmarks and compliance with issues such as carbon emission levels, labor practices and the composition of board directors.
According to a PwC investor study that surveyed 325 investors globally, 79% reported that ESG risks are an important factor in their investment decision-making with almost 50% stating their willingness to divest from companies that do not take sufficient action on ESG issues.
The misconception that companies that focus on sustainable and socially ethical business practices yield lower returns has been dispelled in recent years. According to findings by the Royal Bank of Canada (RBC), these two aims are not mutually exclusive as a clear correlation was found to exist between strong sustainability practices and company performance. Some other key findings from their report include the following:
- Stock price performance is often linked to strong governance and environmental practices.
- Companies with high ESG ratings typically outperform the market in the medium and long term.
- Strong ESG practices result in better operational performance.
- Businesses that focus on sustainability also handle environmental, reputational, and financial risks more effectively, helping to stabilize cash flows.
With findings like these, the trend toward ESG investing looks poised to continue well into the future, enhancing both returns for investors as well as the overall welfare of our world.