The investing environment has changed dramatically during the past ten years. The conventional strategy of only pursuing profits without taking into account an investment’s larger ramifications has been turned on its head. ESG (Environmental, Social, and Governance) investment is a new, more conscientious type of investing that has progressively gained popularity in recent years. This method of investing gives equal weight to an investment’s financial returns and its ethical, social, and environmental effects. We’ll examine the drivers behind the rise in ESG investment as we go further into the subject and what the data reveal about this shifting trend.
What is ESG Investing?
It’s crucial to comprehend what ESG investing comprises before getting into the details. Simply put, it entails taking into account an organization’s environmental, social, and governance principles while making investment decisions. ESG investment aims to influence change for the better in addition to earning rewards.
A company’s carbon footprint, waste management, and sustainability practice’s are a few environmental factors to take into account. Examining a company’s labour policies, data privacy policies, and community involvement are all social elements. The company’s board of governors’ diversity, executive pay, and transparency are evaluated using governance parameters.
An Upward Trend: The Numbers Behind the Rise
Prior to the pandemic, ESG investment was already trending higher, but the COVID-19 epidemic further accelerated this growth. According to a forecast by the Forum for Sustainable and Responsible Investment (US SIF), investments in sustainable practice’s will expand dramatically, by 97%, from $8.7 trillion in 2016 to over $17 trillion in 2020. Global ESG assets reached $35.3 trillion in 2020, according to the Global Sustainable Investment Alliance, accounting for one-third of all professionally managed assets worldwide.
In contrast, Morningstar reported that ESG funds saw a net inflow of $51.1 billion in 2020, which is over twice as much as the $21.4 billion received in 2019. ESG funds have had a total inflow of $21.5 billion so far in 2023.
The Reasons Behind the Rise
This significant increase in ESG investment is being fueled by a number of causes.Increased Climate Change Awareness: The Paris Agreement and the rise in natural disasters have made environmental issues more prominent. Investors are becoming more aware of the enormous hazards that unsustainable corporate practises can bring to investment returns. Investments in businesses that emphasise sustainable and green practises have increased as a result of this knowledge.
Demographic Shift: As millennials and Generation Z inherit wealth and accumulate it, they are investing in causes that align with their ideals. According to surveys, younger generations are twice as inclined to invest in businesses that focus on achieving certain social or environmental goals.
Government and regulatory authorities throughout the world are pressing for more openness about ESG concerns. Fund managers are required to report how they consider ESG risks when making investment choices under the EU’s Sustainable Finance Disclosure Regulation, which takes effect in March 2021. In the United States and other countries throughout the world, similar rules are being explored.
Improved Data and Reporting: Investors may now more easily assess the ESG performance of firms thanks to improved ESG data and reporting. ESG ratings are provided by organizations like MSCI and Sustainalytics, which assist investors in making wise choices.
What the Future Holds
Future trends indicate that ESG investment will continue to grow. According to Opimas research from 2023, the value of ESG assets might reach $53 trillion by 2025, or over a third of all assets managed globally.
It is becoming increasingly obvious that ESG investing is not simply a passing fad but a fundamental change in the financial landscape as investor demand for ESG-friendly firms only grows. The growth of ESG investment highlights a new age of conscious capitalism, one in which economic success and environmental sustainability coexist.