ESG investing involves investing based on how well companies and funds perform on environmental, social and corporate governance measures. According to the CFA Institute, ESG investing has grown in popularity in recent years due to the impact of factors such as climate change and social justice on investors.
This practice began in the 1960s and has been gaining traction in the investment world ever since.
The meaning of each ESG area is as follows.
- Environment – Companies that score highly in this area may be focused on a specific industry, such as renewable energy, or have a particular focus on limiting their environmental footprint in general. They may take steps to limit carbon emissions or use natural resources in a responsible manner.
- Socializing – Companies that value social issues focus on racial and gender diversity in their recruitment efforts and treat employees fairly when it comes to work environments and compensation.
- Governance – Companies with strong corporate governance organize their business in a way that is fair to shareholders and other stakeholders. Executive compensation is tied to shareholder-friendly metrics, and boards are organized to function independently of company management.
Companies that operate based on ESG principles may or may not be suitable long-term investments. However, many investors are increasingly focusing on the impact of their investments, not just profits. Investors interested in ESG investing can choose to buy shares in individual companies or invest in exchange-traded funds (ETFs) that invest based on ESG measures.
ESG investment statistics
- According to a December 2020 study by compliance software company NAVEX Global, 88% of publicly traded companies have implemented ESG initiatives.
- According to a survey by NAVEX, approximately two-thirds of privately held companies are implementing ESG initiatives.
- According to a 2022 survey by asset management firm Capital Group, 89% of investors consider ESG issues in some way as part of their investment approach.
- According to the Capital Group survey, 31% of European investors say ESG is central to their investment approach, compared to 18% of North American investors.
- According to Capital Group, just 13% of global investors think ESG is a “passing fad that will eventually become obsolete.”
- Bank of America, NVIDIA, and Microsoft took the top three spots in the 2023 ranking by JUST Capital, a nonprofit research organization based on ESG indicators.
ESG investing becomes more popular
In recent years, interest in ESG investing has increased as more investors prioritize the impact of how they invest their funds. Global ESG fund assets amounted to approximately $2.5 trillion at the end of 2022, up from $2.24 trillion at the end of the third quarter, according to Morningstar. The roughly 12% increase in assets was almost double the growth in the broader global funds market.
However, growth was overwhelmingly driven by Europe, with the region accounting for 83% of ESG fund assets at the end of 2022 and seeing positive inflows of $40 billion in the fourth quarter. The US, which accounts for 11% of ESG fund assets, saw outflows of $6.2 billion in the final quarter of 2022. The outflow in the US in 2022 followed a long period of positive growth in ESG funds.
Investors around the world are increasingly focusing on ESG issues in their investment strategies. Some 89% of investors will consider ESG issues in some way as part of their investment approach in 2022, up from 84% in 2021, according to research by Capital Group. This growth is primarily driven by customer and reputational concerns, rather than investors' deeply held beliefs, the study found.
Global ESG investment
According to Morningstar, the majority of ESG fund assets are held in Europe, with sustainable funds accounting for 20% of total fund assets. That number is expected to grow further as new funds are launched to capitalize on investor interest in ESG investment management.
Although the United States ranks second after Europe in terms of ESG fund assets, many in North America remain skeptical about the feasibility of ESG investment strategies. According to Capital Group, approximately 61% of North American investors say their asset managers use ESG primarily as a marketing tool to sell their products and enhance their reputation, with 57% in 2021. increased from %. Only 6% of investors in Europe said they were still unsure about ESG investing, compared to 20% of investors in North America.
Challenges in implementing ESG
| Hurdles to ESG introduction | Percentage of North American investors agree |
|---|---|
| Lack of robust ESG data | 46 percent |
| Performance concerns | 49 percent |
| Greenwashing concerns | 37 percent |
| Complex regulatory landscape | 16 percent |
| Lack of suitable products/strategies | 21 percent |
| Focus on short-term investment horizon | 15 percent |
Source: Capital Group ESG Global Study 2022
When implementing ESG as part of the investment process, North American investors are most concerned about its impact on investment performance. Around half of investors cited performance concerns as a hurdle to implementing ESG as part of their investment strategy. Around 46% said the lack of robust ESG data was a major challenge.
Research providers provide ESG scores for both funds and companies to assist investors in their decision making. The score is calculated based on various ESG indicators such as carbon emissions, raw material sourcing, labor management, and tax transparency. This score can be used to compare companies within the same industry or across companies. As companies change their business to become more or less sustainable, their scores will fluctuate in response to those changes.
ESG report
| What you need to better analyze and implement ESG | Percentage of North American investors agree |
|---|---|
| Expanding and diversifying the use of external experts | 18 percent |
| Continued implementation of ESG training and education | 23 percent |
| Large team of ESG employees | 24 percent |
| Addition of automated analysis tools for ESG | 30 percent |
| Further reports from asset managers | 32 percent |
| Strengthening cross-industry portfolio integration of ESG factors | 34 percent |
| Consistent data from asset management companies | 53 percent |
| Standardization of tools and data | 70 percent |
Source: Capital Group ESG Global Study 2022
Because ESG is a relatively new area that investors are incorporating into their investment processes, there is not yet consistent and reliable data on ESG for investors to analyze. Data standardization is one of the most desirable changes needed to better implement ESG practices, and 70 percent of North American investors agree, according to a study by Capital Group. Additionally, more than half of investors say they need more consistent data from asset managers to better analyze ESG factors.
| The most important elements of an ESG report | Investors around the world agree |
|---|---|
| Clarifying the role of ESG in the investment process | 56 percent |
| Report on specific E, S, G elements | 55 percent |
| Third party verification and review | 44 percent |
| carbon footprint | 38 percent |
| United Nations Sustainable Development Goals | 31 percent |
| stewardship report | 30 percent |
| Results of voting rights | 23 percent |
| Case Study | 23 percent |
Source: Capital Group ESG Global Study 2022
When it comes to a fund's reporting on ESG, investors are looking for more information about how a fund uses ESG factors in its investment process. According to Capital Group, more than half of global investors believe that clarifying the role of ESG in a fund's investment process is one of the most important parts of a report. Investors are also interested in further reporting on specific environmental, social and governance factors, as well as reporting on the United Nations development goals and the results of the Fund's mandated votes.
About ESG investors
Investor interest in ESG issues has increased in recent years, and younger investors in particular expect their investments to reflect ESG concerns, according to a recent study from Stanford University. About two-thirds of Millennial and Gen Z investors say they are very concerned about environmental and social issues, while about two-thirds of investors 58 and older say they are somewhat concerned. The survey found that respondents said they were either concerned about it or not at all concerned.
Young investors are even willing to accept lower returns in pursuit of ESG goals. The study found that the average investor in their 20s and 30s is willing to lose 6% to 10% of their investment for a company to improve its environmental practices, while the average baby boomer is willing to lose 6% to 10% of their investment for a company to improve its environmental practices. He didn't want to lose it.
A Stanford University study found that young investors with assets of $250,000 or more said they would be willing to part with 14% of their assets to advance ESG issues, compared with more modest savings. It is said that young investors with only 5-6% of their wealth are willing to part with it. The survey found that young, wealthy investors are the main drivers of ESG investing.
Advantages and disadvantages of ESG investing
- Return on investment can still be high.
- Some ESG funds are available at relatively low costs.
- Money can make an impact while getting a return.
- Owning ESG funds can overlap with traditional index funds, but at a higher cost.
- Companies that score high on ESG factors can surprise socially conscious investors.
- The data are not clear on whether returns are sacrificed by investing in ESG funds, or whether ESG investing has the desired effect.
conclusion
ESG investing is one of the most popular investment trends today and is likely to continue to be an important consideration for investors. If you are interested in ESG investing, you can choose to invest in individual companies through stocks or through his ESG fund, which holds many different companies and helps investors diversify. Be sure to research your investment before making a purchase. Some funds may hold companies that don't align with your values, so be sure to choose investments that you think will have the impact you're looking for.
