The adoption of Environmental, Social and Governance (ESG) funds has been rising steadily for some time now, and yet the question has lingered of whether they are to be a flash in the pan or the centre of our financial future. Environmental factors include the contribution a company makes to climate change through greenhouse gas emissions, along with waste management and energy efficiency. Social include human rights, labour standards in the supply chain, any exposure to illegal child labour, and more routine issues such as adherence to workplace health and safety. Governance refers to a set of rules or principles defining rights, responsibilities and expectations between different stakeholders in the governance of organisations.
With ESG funds reportedly attracting net inflows of $71bn, just between April and June of 2020, there is no denying their significance. Their usage is seeing a rise that is, relative to previous years, meteoric. The transaction network, Calastone, reported data that suggests that the amount of new money invested into ESG funds between April and July is greater than the combined figure for the five years previous.
Having been described by the Head of ESG Investments at Canaccord Genuity Wealth Management, Patrick Thomas, as a “structural trend, highly unlikely to be reversed,” at present, it would appear that a U-turn is looking increasingly unlikely.
Why the sudden increase in ESG adoption?
Market volatility triggered by reactions to the COVID-19 pandemic has brought into clear focus that companies worst affected are those that could be helped most by adopting environmental, social and governance policies.
The real-life impacts of climate change, income inequality, and lack of diversity and representation are in the spotlight and investors are becoming increasingly aware of the impact their investments can have.
It’s not only the pandemic, however, but that has also caused the interest in ESG funds to grow. Some historically popular and profitable industries were already suffering from a fall out of favour. Oil, in particular, had been experiencing a crash on a spectacular scale even before its growth and demand on a global level was impacted by Coronavirus. It seems that investors are looking for more sustainable long term funds, and ESG funds come with the possibility to offer exactly that, with the added bonus of a boost to their reputation as progressive and ethical investors.
But, of course, it’s unlikely that ESG funds would be anywhere near as popular as they are becoming if they didn’t also offer their investors an attractive possibility of return on their investment.
What can we expect to see in the immediate future of ESG funds and is the trend of their growth sustainable? The professional services firm PwC certainly seems to think so, at least in the coming years.
Referring to ESG funds as ‘the growth opportunity of the century’ is no small prediction, and they put this prediction down to four factors: the regulatory overhaul that sees non-compliant sectors penalised, ESG’s outperformance over ‘ordinary’ funds, the increasing demand from investors, and the fundamental societal shifts outlined by the current social, environmental and health circumstances.