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ESG involves researching and factoring in Environmental, Social and Governance issues, in addition to the usual financials, when evaluating potential stocks. Due to the novel coronavirus pandemic and rising concern for the effects of climate change, socially responsible and sustainable investing has been on the rise. In the third quarter of 2020, $81 billion went towards the global sustainable fund network (Source: Morningstar).
So where does this leave ESG investing in 2021? We believe that COVID-19 has accelerated the adoption of ESG investing as the new normal. Here are three key shifts that we predict for 2021 and beyond, which further underscore why ESG is emerging as the new normal.
1. The ESG market will continue to grow.
We believe that businesses who methodically prioritize their ESG footprint and operations will increase value among investors. Building on this, Bank of America recently projected that the money in ESG investing could rise to between $15 and $20 trillion over the next two decades, which is equivalent to the size of the S&P 500 today. This could be attributed to a few factors: growing eco-consciousness among consumers, corporate America being held accountable to their ESG performance, and changing demographics.
2. ESG reporting will be a necessity - not a choice.
In our latest report, ESG Data, Impact Criteria and Measurement, we note that an increasing number of regulatory bodies are embracing ESG, and making ESG reporting mandatory for businesses and investors. The next decade might see ESG reporting becoming a necessity, rather than a choice. Ultimately, ESG data holds answers to many of the non-financial risks that affect an investment’s performance.
3. Growing advocacy for a global, mandated, and auditable ESG reporting framework.
ESG data has proven to be a bottleneck for many investors due to data issues relating to quality, comparability, validity, and more. A positive development in this space, the Organisation for Economic Co-operation and Development (OECD) has noted that “ESG scoring and reporting has the potential to unlock a significant amount of information on the management and resilience of companies, but it will require agreed global data standards and regulations.”
Ultimately, we believe that sustainable businesses that improve their communities and the environment are - and will continue to be - in high demand. Collective pursuit for better transparency will help investors leverage ESG to drive positive change where it matters.
It’s becoming clear that the effects of COVID-19 are here to stay long-term. Add to that the continuing issues of racial inequality, the increasing polarization of American culture in the run-up to the upcoming presidential election and the most recent wave of climate-change driven natural disasters, and it’s becoming increasingly clear that America’s road to recovery will be a circuitous path versus a straight line.
COVID-19 has turned into an inflection point. Not only is the crisis reshaping the ways we live, work, and socialize; but it’s also leading us to reevaluate fundamental issues of economic, social and racial equality – and the role of corporations in shaping progress on those issues.
83% of executives today feel an urgency for business to be a critical part of driving solutions to some of today's most pressing issues — including COVID-19, racial injustice and economic resurgence, according to the 2020 Porter Novelli Executive Purpose Study.
One particular example is the Black Lives Matter movement, which propelled many companies to step up and voice support for justice, reform and equity. This would have been considered a risky business move many years ago. But, today, due to the increased polarization of our country, even the most apolitical household companies have taken an explicit stand on issues like human justice, gun control, immigration, and women’s rights. Corporations that used to stay publicly silent, out of fear of alienating their customer base, now have a business, moral and financial imperative to speak up.
In our latest whitepaper, we discuss the importance of businesses having a positive impact on society and taking an inclusive approach in order to avoid reputational risk, but also to venture into unexplored business domains. The adverse effects of material issues such as climate change, gender inequality, financial exclusion, and resource scarcity are a wake-up call to stakeholders and shareholders, alike. Our view at Aneuvia is that sustainable, equitable investing not only increases intrinsic value, but also produces greater financial returns. In today’s competitive landscape, diversity and inclusion isn’t an option, but an imperative.
View our latest whitepaper for more on sustainable and impact investing.