ESG matters because it gives investors an approach and the tools to pursue an investment strategy that reflects their principles. Just as importantly, by following an ESG approach you are not only making good choices but pushing for change to create a better future. And without having to sacrifice investment returns.
Where is ESG going?
At this stage, we are all familiar with what ESG investing is trying to achieve. While some believed this may be another passing trend, we believe that it’s increasingly clear that ESG is here to stay. Companies have put in place the requirements necessary to adhere to the wide breadth of regulations. Investors meanwhile are pushing companies to actively address issues relating to ESG.
There was a belief that opting for sustainable investing might mean sacrificing returns. This perception was an initial barrier to the growth of ESG investing. However, now that a large amount of funds have built track records, it has been shown that returns are on at least a par with other less responsible options.
However, ESG investing in its current state is still quite new. It’s interesting to see what way this investment approach is developing and what strands of it are becoming more appealing to investors.
Growth of Specialist Funds
From a starting point of overall “ESG” funds, there is a growing trend toward standalone specialist funds. In particular, and unsurprisingly, those relating to Climate and Clean Energy are showing major growth. According to recent data from Morningstar Investments, there has been an increase in the availability of Climate Funds globally. Europe is not only the leader in the number of funds but also is the most progressive region for them. Within these, the most popular segment, “Climate Conscious” funds represent a mix of Low Carbon funds and Climate Solution funds.
Together with this is the growth in the Clean Energy fund category. Not only are individuals looking to reduce their carbon footprints, but this is high on the agency for many corporates as well. These types of Clean Energy/Clean Tech funds are more sought after in the US and Chinese markets. But with climate solutions high on everyone’s priority list, this trend is likely to be seen in Europe shortly.
Areas to Watch
While funds relating to areas of the environment are very topical, we must not forget that there are many other elements to ESG. The S and the G are often hidden elements that form part of the overall picture. For many companies, it is these that make them just as socially responsible as others. Two areas that I feel are worth watching are the drive for sustainability in the fashion industry and the employee agenda.
A light is being shone on the fast-fashion industry, it’s impact on the environment and social inequality. There is an increasing demand to put in place appropriate measures to address this. On the employee agenda side, employee wellbeing, in particular mental health is featuring strongly as well as operational issues that impact social inequality. Both areas are worth keeping a watching brief on.
Why ESG will continue to matter
My own view is that ESG is here to stay. It’s not a fad or feel-good exercise and the flows of investment into ESG funds demonstrate this. Not only does ESG matter but it is going to continue to matter. It is not the companies or the investment industry driving this but the investors themselves.
And it’s not just about the environment. Simply put, there is an ongoing and visible shift from traditional investments to more ethical, sustainable, and responsible options. Europe is a driving force and leading the way for investors in the ESG arena, giving us a huge range of choice throughout the risk spectrum. ESG is becoming the mainstream and with returns holding strong there is no reason to believe that this won’t continue.
At Prudent Financial, we pride ourselves on matching investor profiles – high, medium and low risk – with suitable investment options. We also have access to a range of investments with very strong ESG credentials to suit all risk appetites. So if you’d like to have a chat about the ESG options available to you, please just get in touch.