ESG: By No Means A Passing Fad; It’s a Mega-Trend
A host of factors are indicating that the ‘green revolution’ in investing – ESG – is here to stay.
Investors are cracking the whip to ensure that their demands for ESG (environment-social-governance) options are met. Money is flowing to ESG-focused ETFs and mutual funds, while hedge funds that are slow on the uptake are being cold-shouldered. BlackRock CEO last month told investee company CEOs that “we are on the edge of a fundamental reshaping of finance,” with reference to climate change and climate risk. He further warned that BlackRock may vote against non-compliant management and board directors. Clearly, the tide has turned decisively in favor of responsible investing. (CNBC)
But is this a flash in the pan, or is the trend here for good?
Germany has decided to switch over completely from coal to renewable energy by 2038. Oil giant BP is aiming to have net-zero emissions by 2050. The UK is moving to end sales of all non-electric cars by 2035.
There has been a veritable explosion in the issue of green bonds in 2019. A total of 479 green bonds issued globally, up 25% year-on-year, and raising $185 billion. Further, 2020 is shaping up to be yet another bumper year for these bonds.
The 2020 Global ETF Investor Survey conducted by private bank Brown Brothers Harriman (BBH) estimated that nearly three-quarters of global investors plan to increase their ESG ETF allocation over the next year.
Furthermore, in five years, almost a fifth of investors said they intended to park between 21% and 50% of their portfolio in ESG funds.
Meanwhile, a survey by the Alternative Investment Management Association (AIMA) and KPMG of 135 institutional investors and fund managers showed that 84% had a rising interest in ESG-focused funds and strategies in the past year.
Indexing provider MSCI is very bullish on ESG
MSCI is so confident of sustained investor interest that it expects its ESG indexes to ultimately grow bigger than its traditional indexes. (CPI Financial)
According to Remy Briand, Head of MSCI’s ESG research, “assets under management following the company’s ESG gauges will likely double in 2020, continuing last year’s trend.”
In fact, MSCI’s ESG benchmark revenues grew between an estimated 60% and 65% to $38 million in 2019.
Meanwhile, the MSCI ACWI ESG Leaders Index has gained more than 50% in the past five years. It has solidly outperformed the rise of about 35% in the MSCI All-Country World Index. (However, tech and finance shares have the biggest weightings in both indices, accounting for more than a third in each.)
All these factors together indicate that ESG investing is here for the long-term.
“The traditional risk-return equation is being rewritten to include ESG factors,” said Anthony Cowell, KPMG’s head of asset management in the Cayman Islands.
Related Story: BlackRock Makes Big ESG Push on ETFs
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