The term ‘Environmental, Social and Governance’ or ‘ESG’ investing was first coined in 2004 in a study by the UN Global Compact entitled ‘Who Cares Wins’ – swiftly followed in 2005 by the introduction of the UN Principles for Responsible Investment (UN PRI), led by then-Secretary General Kofi Annan. A voluntary set of principles designed to help institutional investors incorporate ESG factors into their investment decisions in order to better manage risk and generate sustainable long-term returns, the UN PRI currently boast over 2,000 signatories worldwide – and have been followed in their turn by numerous other metrics, development goals, targets and taxonomies. As the marketplace expands the message is clear – ethical investing is becoming big business.
Today, ESG investment strategies are estimated to account for over US$23 trillion in assets under management – almost a quarter of total global assets under management. Add to that a growing green bond market that topped $167 billion with 1,543 issuances across 44 countries in 2018, and it is clear that ethical investing is becoming an impossible force to ignore. And there are good reasons why. With mounting evidence that ESG integration can positively influence the performance of investment portfolios, growth in today’s climate is increasingly being driven by commercial as well as moral considerations – pushing the ESG agenda ever further into the mainstream.
A recent study by the UN PRI based on portfolio analytics and ESG data provided by MSCI ESG Research found that ESG information offers a measurable advantage in the construction of optimal mean-variance portfolios across all regions. In the MSCI world portfolio, ESG momentum and tilt strategies outperformed the MSCI World Index by 16.8% and 11.2% in active cumulative returns respectively over a 10-year period.
In other words? Ethical investing can make you more money. It is no wonder, therefore, that the sector grew by 25% between 2014-16, according to the Global Sustainable Investment Alliance. In Europe, 53% of total professionally managed assets now use responsible investment strategies. BlackRock, the world’s largest asset manager, estimates that by 2028 ESG strategies will account for 21% of all ETF and mutual fund assets – up from just 3% in 2018. And with the Paris Agreement and the UN SDGs requiring estimated investments of up to $7 trillion a year to 2030, these trends are only likely to grow as demand increases and the private sector plays an ever more important role.
With figures like these, can you afford not to be informed?