- Global corporations have also taken note of the investor’s appetite for ESG investing.
- Integrating ESG into investment strategies can improve returns as well as reduce risk.
- ESG investing has yielded higher performance yields than non-ESG equivalents.
Environmental, social and governance (ESG) investing is becoming increasingly popular amongst asset managers and owners as more investors seek to align their financial goals with their ethical values. According to BanklessTimes.com, global ESG assets are on track to exceed $53 trillion by 2025. Regulatory pressure increased sustainability-related education and the shift of capital to the younger generation, all driving this growth.
According to BanklessTimes CEO Jonathan Merry, "The advantages of ESG investing have become more apparent in recent years. Not only have the fees associated with ESG investing decreased, but most ESG funds have outperformed the wider market over the last decade. This is likely due to superior returns performance and a greater focus on long-term sustainability."
Advantages of ESG Investments
Investors are recognizing the potential returns that ESG investments can yield. ESG investments are not just about doing good for the environment; they can provide tangible financial benefits. Integrating ESG into investment strategies can improve returns as well as reduce risk. Returns from investments with ESG considerations have consistently yielded higher performance yields than non-ESG equivalents.
ESG investing can also give investors a sense of pride that their money is going towards causes they believe in and are passionate about. Furthermore, with increased transparency and better disclosure of ESG information by companies, investors now have more detailed insights into how their money is being used.
Finally, investors can rest assured that their investments are less likely to be exposed to residual risk associated with non-sustainable activities. As Merry further explains, "ESG investing helps mitigate risk by avoiding investments in companies with a poor ESG track record. Instead, investors are more likely to focus on companies which have a positive ESG impact."
Ultimately, with more money entering the market and a greater focus on sustainable investing, organizations will be encouraged to integrate sustainability into their core strategies. This will lead to increased disclosure of ESG information and a greater emphasis on long-term sustainability. As more investors become aware of the potential for ESG investments to yield higher returns, this trend will only continue to grow.
More Options for Investment Strategies
The increased popularity of ESG investing has led to an influx of new products entering the marketplace, offering investors more options when it comes to investing responsibly. ESG investments can range from actively managed funds, which focus on specific sustainability themes, to passive ETFs and index funds which track specific environmental and social indices.
By offering a more comprehensive range of ESG investments, asset managers can better tailor their funds to their investors' specific needs and values. This will help ensure investors can reap the full benefits of investing in companies that are doing good for society and our environment.
To further support this trend, asset managers and owners continue to sign up for the Principles of Responsible Investment (PRI), with over $100 trillion in AUM (Assets under management) now represented as members. In addition, many have signed up for the Net-Zero Asset Owner Alliance.
The Alliance, representing 80 institutional investors with $11 trillion in AUM, has been encouraged by the development of climate benchmarks by the EU. While these are a welcome addition to the index universe, there is still a lack of climate indices that can be applied broadly and used in globally diversified multi-asset class portfolios.
This shift in investment strategy implies a strong climate-friendly future for our global economy. With more investors turning to ESG investments and with the continued development of these indices, sustainable investing is on track to become a core part of our economic landscape.
Demand for ESG Investment Products Significantly Outweighs the Current Supply
Demand for ESG-oriented products is still far outpacing supply, with 30% of investors reporting difficulty finding attractive and adequate ESG investment opportunities. 88% of institutional investors surveyed believe asset managers should be more proactive in developing new ESG products. Despite this, only 45% of asset managers said they are planning to launch new ESG funds.
With the increasing demand for ESG investments driven by both financial and ethical motivations, the future of ESG investing looks set to continue its growth trajectory. Asset managers, owners, and platforms have an opportunity to provide investors with more efficient access and enablement options, allowing them to make more informed decisions on their investments. In turn, this could drive even greater returns on ESG-focused portfolios as well as improve long-term sustainability.
Finance and ethical values no longer need to be mutually exclusive. ESG investing can provide investors with the best of both worlds, achieving long-term profitability while making a positive environmental and social impact. Now could be the time for asset managers and owners to take advantage of this opportunity and capitalize on the growing demand for ESG investment products.
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