Socially responsible investing is having a renaissance, and this year has seen a marked growth in Environmental, Social and Governance Funds. While it is natural to expect interest in these types of funds to increase over time, the recent pace of their growth has been particularly notable.
In 2019, Patrick Thomas, Head of ESG Investments at Canaccord Genuity Wealth Management, described the adoption of ESG as “a structural trend, highly unlikely to be reversed” and this certainly rings true to date. As of the close of July 2020, ESG themed exchange traded funds had broken records by drawing in $38bn of new money for the year, breaking the $100bn total asset mark for the first time.
What is an ESG fund?
At its core, an ESG fund is a fund which allows an investor to invest in line with the values and beliefs that they consider important, both in and outside of business. Specifically, ESG refers to the Environmental, Social and Governance criteria that allow potential investors to gauge the impact that these companies, and by extension their investments, have on the world at large.
Environmental considerations will look at a company’s carbon emissions and whether they aim to be carbon neutral or even carbon negative. Also, the types and levels of energy that the company uses, and even how they handle the management of their waste.
Societal considerations include the ways in which companies treat their employees, as well as those they interact with at all levels of the supply chain; whether they offer equal job opportunities, fair hiring practices and general employee wellness.
With Governance considerations, how a business is structured and the business practices that they employ are of key importance. Are company boards representative, are the interests of minority shareholders respected and protected, and is executive pay tied to performance or capped in relation to lowest paid employees?
Why are they growing so fast now?
Topics surrounding ESG funds were always going to be of increasing importance to investors and the world of business in general, but the events of 2020 seem to have accelerated the process. With COVID-19 comes a spotlight onto those worst affected, generally also those paid the least. It’s brought a further urgency to tackle issues such as income inequality, climate change and a lack of diversity and representation.
Investors are becoming more conscious of the impacts of their decisions, and institutions are encouraging their use. The UN has outlined in its Principles of Responsible Investment a call for investors to incorporate ESG issues into their investment decision-making processes and investment analysis.
In Europe, more sustainable funds are being created than ever before, and their low exposure to the oil and gas markets saw them widely outperform the stock market as a whole during the March COVID-19 induced sell-off. Even without that short term influence, ESG funds have been shown to outperform their traditional counterparts over a 10 year period.
It’s an exciting time to be involved with sustainable investing. With clarity around ESG Standards, the options available, and data on returns only set to improve and increase as time goes on, ESG funds are expected to have an exciting future.