This year has brought about a pivotal shift in the acceptance of ESG investing. Total assets invested in the category grew more than 70% in the nine-month period from September 2019 to May 2020. With market penetration still low, the screening process continually improving, and several positive catalysts on the horizon, ESG investment vehicles will experience exponential growth from here.
Related ETFs: iShares ESG Aware MSCI USA ETF (ESGU), iShares ESG MSCI EM ETF (ESGE), iShares ESG MSCI EAFE ETF (ESGD)
The notion that environmental, social and governance (ESG) investing can deliver feel-good outcomes and better investment performance — the so-called “double bottom line” — has been circulating for at least a decade and a half. Investors have been slow to embrace that notion, however, which is why ESG funds has been met largely with indifference. Until now.
Indeed, we are seeing a pivotal shift in the acceptance of ESG investing. Total assets invested in the category grew more than 70% in the nine-month period from September 2019 to May 2020.
In a white paper titled “ESG Investing: From Tipping Point to Turning Point, State Street Global Advisors makes the case that ESG investing is about to move from a check-the-box component of investment portfolios to a must-have ingredient in every portfolio. The authors anticipate a nearly eightfold increase in global ESG ETF and index mutual fund assets — from $170 billion as of May 31, 2020 to more than $1.3 trillion by 2030.
Below are a few catalysts that will fuel the ESG revolution.
I. The Great Reset of 2020
The coronavirus pandemic has disrupted the rhythm of millions of lives around the world, forcing an introspective time-out, a paradigm shift on how we do things, and a re-evaluation of priorities in many cases.
During that time-out, a number of extreme events — such as, workplace safety during the pandemic, wildfires in California, floods in China, social unrest in America, corporate malfeasance, and growing wealth inequality — have drawn greater attention to health, climate, social, and financial imbalances. These events seem to have heightened the collective social consciousness and drawn more people toward ESG-based investing as a way to drive change.
A July survey by BNP Paribas Asset Management about ESG showed that social issues have gained prominence among investors since the onset of Covid-19. Meanwhile, an executive at RBC Global Asset Management reports that financial advisors are getting more interest from retail investors about ESG.
Looking back, 2020 may prove to be a watershed year for ESG.
II. Booming Demand for ESG Instruments
ESG ETFs attracted $20 billion in net inflows between January 1 and the end of September. That compares to $8 billion in inflows for all of 2019, and it brings the total AUM for ESG ETFs to $40 billion. Although that’s just a tiny share of the $4 trillion ETF sector, the next decade will bring exponential growth to…