Top 3 Trends of ESG in 2021: Fostering Sustainable Investments
By: Americana Chen
Tags: Investment, Sustainability, Investing, Top 5, Trends

2. Booming Phase of ESG Investment

In the early phase of the development of ESG investing, the question that was being asked most frequently by investors is ‘Do ESG investments really outperform?’. Indeed, the ultimate drive behind investing is to generate return, and in the past few years, ESG focused financial products have proven itself to be able to meet investors’ expectations. According to MSCI ESG Research: for the past 5 years, U.S. companies with high ESG rankings in the S&P 500 index have outperformed their counterparts with lower ESG rankings by at least 3% every year. The consistency of outperformance has driven more investors to be willing to consider adding ESG investment products into their portfolio. Demand is rising dramatically, just looking at the US market, flows into sustainable funds reached US$8.9 billion through the first six months of 2019, compared to US$5.5 billion in all of 2018.

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With surging demand, there has been increasing pressure from investors to urge their asset managers to adopt ESG investment elements when constructing portfolios. According to Russell Investments’ sixth-annual ESG Manager Survey, 78% of 400 asset managers across a variety of asset classes and geographical regions now explicitly incorporate qualitative and quantitative ESG factor assessments into the investment process. There is also effort from regulatory authorities to push for positive changes. In March 2021, EU Sustainable Finance Disclosure Regulation will require asset managers to report on the sustainability characteristics of their investments. This will be a driving force for the widening and deepening of the scope of ESG investing, and the growth of ESG investments in 2021 is definitely very optimistic.

“ESG is no longer an optional ‘add-on’; it is now an essential consideration that asset managers have to incorporate into their decision-making processes. — Jihan Diolosa, Head of Responsible Investing EMEA

We’ve seen this trend in individuals and asset managers, but more importantly, many large banks are also taking the lead to set the stage for ESG investments. More banks are tying up their compensation to asset management with their ability to meet ESG criteria. For instance, for BNP Paribas it’s arond 20% of its variable pay , and on December 7th, 2020, Deutsche Bank also disclosed its plan to associate asset management compensation with hitting sustainable finance investment goals in 2021.

More participants in our economy is joining the move to align their goals with ESG objectives, Paris agreement and sustainable financing. As more funds are be devoted to investments in this space, this provides greater liquidity, more optimistic market conditions, and will eventually drive for greater return and lead us to a positive feedback loop.

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Another factor that contributes to this rapid growth phase is the fact that the categories and asset types of ESG investment have expanded and will continue to expand in 2021. Except for ESG bonds, ESG ETFs and ESG stocks that we are familiar with, many alternative investments have also decided to incorporate ESG components. An active player is ESG hedge fund, more hedge funds are adopting ESG principles as asset owners seek to integrate ESG considerations across their entire investment portfolio. ESG investing is also increasingly recognized by hedge fund as a means to improve risk return profile. Primarily adopted by multi-strat hedge funds and equity long/short strategies, ESG hedge fund is growing rapidly and it is very likely to see competition driven adoption of ESG hedge fund into other strategies. ESG in real estate is also growing substantially, ‘Green real estate’ and ‘Green building’ have been gathering momentum and attracting more investors. According to the World Economic Forum, back in 2016 there were already 40–48% of new commercial built as “green”, compared to only 2% in 2005, and they have projected that it would rise to 55% in 2020. Other asset classes with ESG policies in place include private equity, venture capital, infrastructure and commodities market.

A combination of these growth factors are evidently signaling to us that ESG investing will definitely experience its boom phase in 2021.