Just looking at the numbers alone, ESG investing was a giant success story in 2020. Assets in ESG soared higher than ever in the U.S., and globally, and the number of investment products incorporating environmental, social and governance criteria exploded.
About $1 of every $3 that Americans invest supports some sort of sustainable investing, to the tune of $17 trillion -- a 42% jump in 2019 over the previous year, according to the Forum for Sustainable and Responsible Investment, or US SIF. The increase coincides with a sea change by money managers and institutional investors in how they consider ESG factors to help identify responsible, well-managed companies that will be resilient over the long term.
Performance of socially responsible investments during the most stressful and volatile part of the year lent that theory further support. Morningstar’s sustainability ratings system found that funds with the highest ESG ratings not only outperformed funds with the lowest ESG ratings during the first quarter of 2020, but also outperformed the broader market.
During the first quarter, when the S&P 500 Index fell by 23.6%, global large-cap stock funds with the top rating of five Morningstar globes had an average decline of 17.7%. On the other end of the spectrum, funds in the same category with a Morningstar rating of one globe lost 26.6% during the quarter.
Looking ahead to 2021, three trends suggest these numbers will reach new records again next year. They are increasing climate change commitments, booming issuance of sustainable debt and loans, and the “social” of ESG.
This month on the fifth anniversary of the Paris Agreement -- a global deal that aims to substantially cut greenhouse gas emissions to curb the global temperature increase -- 75 nations and companies made new pledges to cut emissions, including significant commitments from the European Union and U.K., Argentina and the Vatican.
President-elect Joe Biden said he’ll put the U.S. back in the deal after he’s inaugurated in January 2021 and will convene a summit to convince the biggest emitters to a net-zero target for the U.S. by 2050. At that point, 70% of the world economy will have made commitments to be carbon neutral by 2050 or 2060.
Importantly, the number of asset managers, oil companies and others in the private sector that have set long-term emission-cutting promises has risen through 2020 and investors increasingly are pressing for such actions.
In 2020, the transition to a fossil-free production system “took off,” according to the Swedish bank SEB AB. The year’s issuance of debt and loans that meet ESG criteria is expected to reach about $650 billion.
Next year, the global issuance of debt that meets sustainable investing criteria is set to reach at least $1 trillion, according to a recent forecast by the bank, which was the first ever to produce a green bond more than 10 years ago. That total is expected to include about $500 billion in green bonds alone, SEB said.
Investors are eager to buy new debt and volumes of sustainability-linked loans are expected to be significantly higher, according to the bank.
The “S” has always been the least clear of the ESG, but the double whammy of the pandemic -- which has had an outsized impact on the most vulnerable people -- and the new demands for equality sparked by the Black Lives Matter campaign have brought social causes to the forefront.
How companies treat their employees and what they demand of their suppliers will increasingly be an issue investors demand to know about and influence, including through shareholder advocacy. Look for even more products that incorporate social justice investment strategies in 2021.
And for advisers? Bolstered by the nationwide social unrest and calls for equality, clients in 2020 asked more questions about aligning their financial interests with their investment portfolios and that won’t subside in 2021. Being proactive about asking clients if they’re interested in ESG investing next year is likely protecting those assets from another adviser who takes the opportunity to address the elephant in the room.
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