It is asserted that the hottest acronym in asset management today is ESG – environmental and social governance.
It is pretty safe to say ESG is having a huge effect on funds under management.
But how much is hard to define.
Reuters last year estimated that funds which take account of ESG factors when deploying capital amount to more than $1 trillion.
Some in the market are more conservative in their assessment while acknowledging the trend – BlackRock estimating that the ESG investment market will grow 16-fold, from $25 billion to $400 billion over the next decade.
Others go way higher, the Global Sustainable Investment Alliance talking of over $30 trillion.
One suspects that the discrepancies are perhaps to do with how you define ESG.
What is incontrovertible is that huge companies, from Amazon to BP, are being challenged on everything from gender diversity to climate change to artificial intelligence.
From David Attenborough to Greta Thunberg to Extinction Rebellion demands for an alternative approach are striking a chord.
The number of people, especially baby-boomers and millennials, asking how climate change and other ESG issues will affect their investments is growing.
Until as late as 2000, ethical investing was seen as something of a niche area. But it has now taken off in a big way.
Sustainable investment is perceived as not only good for the planet but also for broadening the scope of diversification within investors’ portfolios.
Global financial services firm Morningstar quotes Peter Michaelis, head of sustainable investment at Liontrust Sustainable, as stating: “We invest in three transformative trends – better resource efficiency, improved health and greater safety and resilience, and 20 themes within these trends such as technological and medical advancements.”
This includes healthy food, industrial automation, efficient buildings, smart farming and electric vehicles – with diesel cars in reverse gear due to decarbonisation and pollution issues there are likely to be huge opportunities in components, semiconductors and infrastructure for electric and hybrid vehicles.
Hermes Impact Opportunities Equity fund says it considers the United Nations’ Sustainable Development Goals when making its investments and maintains that such long-term opportunities “transcend the cycle, thereby reducing cyclical volatility”.
ESG criteria are becoming increasingly influential partly because more and more of us want to know that at least some of the money we invest is going to help make a positive difference to the world. Or at least won’t be supporting companies that don’t match up to the ESG message.
But those considering such investment should not expect some sort of magic wand.
“The cost of renewable energy is in significant decline and can now outcompete other forms of power generation in many areas of the globe without subsidies” says Dan Wells, a Partner at Foresight Group.
Speaking to Good Money Week, Craig Bonthron, of the Kames Sustainable Ethical Investment Fund, added: “Going green requires hard work and detailed analysis of the companies being invested in.”
Also, there are different approaches to investing responsibly. For example, some funds that promote themselves as having an ethical or ESG stance may still invest in companies with alleged poor practices, intent on using their shareholdings to pressure them into reform.
So what is driving all this?
It is a combination of factors – greater awareness of the effects of climate change, the vagaries of corporate behaviour, the fall-out from the 2008 financial crisis and an increasingly high ESG media profile.
Essentially, more and more individuals are taking the view that their voice can have an influence however small.
ESG investment exposure makes sense – no longer akin to a charity donation but standing on its own feet in terms of returns.