Figures released last year by the Investment Association showed that over £7 billion was placed in ESG funds – those focused on ethical, social, and governance factors – between January and October 2020. That’s almost four times the amount for the same period in 2019.
Not only were inflows high for ESG funds, but the returns were good too. Research by investment manager Fidelity International revealed that in the first three quarters of 2020, stocks with higher ESG ratings had better returns for every month apart from April.
So, what caused the good performance for ethical funds seen in 2020, and what will 2021 bring?
ESG ’s performance in 2020 was partly due to the impact of coronavirus
ESG investments experienced a bumper year in 2020 for many reasons, including a continued focus on climate change, issues of social justice, and the coronavirus pandemic.
The threat to health and jobs posed by Covid-19 saw communities and neighbours come together and support each other. Investors expect the same from the companies they invest in. How a business looks after its staff – physically, mentally, and financially – plays a much bigger part in whether we will trust them with our money, post-pandemic.
2020 also saw continued focus on issues of climate change and pollution as lockdowns forced cars off the roads and workers out of city centres. Decreased air pollution hit the headlines, nature reclaimed our beaches and waterways, and rare species like the orca and peregrine falcon suddenly thrived.
Away from Covid-19, Black Lives Matter protests made global news in the wake of the killing of George Floyd. Issues of equality also led to increased scrutiny of companies’ levels of diversity.
According to FT Adviser, ethically responsible funds saw net inflows of nearly £1 billion in September 2020 alone – ESG is now mainstream. This has led to increased engagement, as well as more options for investors, as the market swells to accommodate the rise in demand.
Climate change has also helped to inform international policy, forcing increased reporting on ESG and a global understanding of the need to protect the environment.
President Biden’s commitment to the Paris Agreement, as well as China – currently the biggest carbon emitter in the world – committing to achieve carbon neutrality before 2060, kept ESG factors in the forefront of all our minds.
Increased investment among millennials helped too. A 2019 report from Morgan Stanley found that 95% of US millennials expressed an interest in sustainable investing, with 67% taking part in at least one sustainable investing activity.
Schroders Global Investor Study 2020 surveyed 23,000 global investors and found that only 20% of UK millennials would be willing to invest in a way that went against their beliefs.
2021 trends to watch out for
- Climate change is still centre stage
As already touched upon, President Biden has re-entered the US into the Paris accord. This is good news, but – despite the agreement being signed back in 2015 – the hard work is only just beginning.
The MSCI suggests that as the requirements of the Paris accord become harder to achieve, the ESG landscape – or at least the landscape of Paris-aligned investments – could shrink.
This will depend on how quickly governments and companies can get up to speed and make the necessary changes.
- The ESG landscape will grow as it matures
An Organisation for Economic Cooperation and Development (OECD) report confirms that, currently, more than 11,700 public companies disclose sustainability data. This number will continue to grow.
S&P Global believes that ESG becoming mainstream will mean investors (and therefore asset managers too) apply greater scrutiny to companies, ensuring their ESG credentials are more than a box-ticking exercise.
In 2021, as ESG investors become increasingly savvy, we’ll likely see a clampdown on “greenwashing”, the process of exaggerating or misrepresenting environmental credentials. We could also see similarly increased awareness around social factors.
- Social inequality a continuing factor
Although the rollout of vaccines and the recently announced roadmap will hopefully see a return to something closer to normal this year, the impact of coronavirus on many aspects of our lives will remain. This includes the social inequality highlighted by the pandemic.
According to Pension & Investment, “social washing” can occur when the impact of an investment on employees’ worker’s or human rights is falsely overstated. With societal issues becoming more important, asset managers and investors alike will need to demonstrate that their ESG decisions go beyond box-ticking.
Get in touch
Sustainability, and the fight against climate change and societal inequalities are at the heart of ESG investing. If you are considering an ethical investment, speak to us now. We can help you put together a portfolio that aligns with your values but also has the potential to provide good returns, helping you to achieve your long-term goals.
Please get in touch and find out how our team of expert financial planners can help you.
The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.