5 current ESG investment trends
It’s clearer now more than ever, that ESG (environmental, social, governance) investing is more than just a passing fad. More and more of us are thinking about what we want to invest our money in – not only for our own long-term future, but also for that of the planet and for society as a whole.
In this article, we take you through the current ESG investment trends and how we can help you capture these trends in your discretionary or advisory investment portfolio.
ESG trend one - growing immediacy of climate change
Unless you’ve been on a desert island for the last 20 years, you are probably very much aware of the immediacy of climate change – melting glaciers, rising sea levels, aggressive bush fires, soaring global temperatures, declining numbers of endangered species.
Environmental issues are always in the headlines, along with scientific reports pointing to the same conclusion: that human-caused climate change is warming the earth – and hopefully the worst effects can still be avoided by drastically reducing greenhouse gas emissions over the next two decades. Extreme weather events are spurring investor concern about climate risk.
Increasingly investors want fossil-fuel-free portfolios and the demand to fund climate-change solutions through their investments is growing. And investor sophistication and knowledge about what their money is being channelled into is also increasing. So if you’re a company that has less than sparkly climate change credentials, beware – if investors haven’t cottoned on yet, they will do soon.
ESG trend two - no more shareholder value at any cost
The corporate world has changed – or has started to – over the last few years. The raison d’etre of listed businesses has always been about shareholder return, often at the expense of everything else. But now companies are realising it’s not the be-all and end-all. Doing the best for all stakeholders, whether they are customers, employees, communities or shareholders is becoming a key consideration.
This in turn drives reputation management and protecting the brand. The more considerate you are as a company, the better reputation you will have – and research has shown that the better your reputation, the better your prospects and the more likely you are to succeed.
The upshot is that ESG investors are making companies think more about stakeholders than just shareholders, because they can direct where their money goes. Money talks and it can have a considerable impact on how companies behave – corporations are more likely to adopt a stakeholder-centric view if they have a base of investor support for it.
Of course, funds with sustainable investment strategies vary in their particular approaches, but at some level, most of them are trying to identify companies that are pursuing stakeholder value, avoid those that aren't and engage as shareholders with the ones they own to influence their direction.
ESG trend three - increasing importance of the UN Sustainable Development Goals (SDGs)
With responsible investing comes burgeoning demand for funds that are not only geared towards solving some of the world’s sustainability challenges but ensuring their underlying portfolio companies are meeting specific criteria aligned to the UN Sustainable Development Goals. This makes the fund’s impact clearly measurable.
According to the UN, the SDGs are a blueprint to achieving a better and more sustainable future for all. The 17 goals address the global challenges we face, including those related to poverty, inequality, climate change, justice etc. As a result of the UN SDGs, we have seen thematic fund launches in areas such as clean water, renewable energy and social housing.
ESG trend four - active ownership taking centre stage
Another ESG trend is greater support for ESG-related shareholder resolutions – shareholder activism. Research shows that in 2019 ESG resolutions drew the support of nearly 30% of the shares voted at the annual general meetings of US companies, the highest level of support ever.
There is also evidence that sustainable investors have ramped up direct engagement with companies in in recent years, taking on ESG-related issues like guns, gender equality and climate change. A group of activist investors called the Climate Action 100+ engage with greenhouse gas omitting companies about aligning their business goals with those of the Paris Agreement – it liaises with these companies to encourage them to put targets in place regarding emissions reduction and plans of how to achieve that.
ESG trend five - avoiding ‘greenwash’
‘Bandwagonism’ is a common practice in all walks of life and investment is no different. Greenwashing refers to falsely marketing a product as sustainable – many funds over the past few years have started to use terms like ‘responsible’, ‘sustainable’ or make reference to ESG in their literature, but when you dig down and look at the underlying portfolio companies, this isn’t necessarily the case. Deciphering between what is actually an ethical fund and what purports to be, isn’t easy.
As a discretionary or advisory client, our investment management experts can look for meaningful and measurable claims rather than generic statistics on your behalf. Just as you would be cautious of products making generic claims of ‘100% natural’ or ‘environmentally friendly’ without information as to how or why. We place the same scrutiny over each fund by asking questions like ‘does the fund have an explicit exclusion for fossil fuels or thermal coal?’ Or ‘does the fund have a strategy focused on investing in products that benefit the environment?’
How to avoid this trend…
Find this useful? Read more about ESG investing:
- Our ESG investment strategy
- Responsible investing is here to stay
- Sustainable and responsible investment themes shaping our future
Speak to one of our ESG investment experts
As this fascinating area of investment proliferates, we are sure that other ESG trends will emerge. But as always with investment, diversification is important to help you achieve your own financial goals.
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Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested.
This is not a recommendation to invest or disinvest in any of the themes or sectors mentioned. They are included for illustrative purposes only.
The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.
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Investment involves risk and you may not get back what you invest. It’s not suitable for everyone.
Investment involves risk and is not suitable for everyone.