2022 may have been a bumpy year for the concepts supporting environment, social and governance (ESG) initiatives, but interest in the field remains strong. Investments are growing;
one study found that $120 billion was put into sustainable funds in the first half of the year alone.
And this momentum will continue. Almost
90% of emissions are now targeted in net-zero commitments. Most businesses now have ESG plans as they seek to be the good corporate citizens their customers increasingly expect.
ESG’s rapid growth and booming returns
Of course, cynics and sustainability deniers claim that companies and their investors are simply jumping on the latest bandwagons. Debate swirls around whether ESG initiatives do what they set out to do, while it’s not hard to find examples of greenwashing.
Yet overall, the market is maturing –
Deloitte notes that, at their current growth rate, ESG-mandated assets “are on track to represent half of all professionally managed assets by 2024.”
Plus, this isn’t about simply appearing to do good – the days of making loss-leading investments in green or socially positive vehicles for PR purposes are long gone, with everyone waking up to the profits available via ESG.
According to one report, stock funds weighted towards companies with positive ESG scores outperformed globally over the last five years, with those in Europe and Asia-Pacific doing best.
The impact of age on investor attitudes
In addition to that, evolving investor demographics look likely to propel ESG funding further forward. Just two-fifths (42%) of older investors said it is extremely or very important to them that they influence environmental practices, compared with 79 percent
of younger investors.
Older investors are also less keen on other aspects of ESG, as well; a significant minority do not want to see investment companies advocate for social (36 percent) or governance (34 percent) issues.
It’s important to remember that many industries, companies and projects can fall under ESG. Much of what we’ve discussed already is at a high level, but within the market, some assets will not perform as well as others.
Investors should also recognise that it’s not just a technology field. Perhaps because, as a concept, it is a relatively new market, many presume that ESG needs to be linked to a form of bleeding-edge tech. Yet some of the best-performing asset classes falling
under the ESG banner have been around for a long time.
Out-performing high tech with slow growth
One high-performing example is forestry. In 2021, a bumper year generally for ESG, UK forestry outperformed the S&P 500, FTSE 100, UK investment grade bonds and even property to return 33%. It’s not
even a one-off – over five years, it returned 22%, dropping to 19% over 15 years.
It’s true that timber, forestry’s output, is most often tied to construction, so struggling economic periods can hit prices. But tree growth isn’t affected by the broader economy – they’re still going to grow. Plus, once mature, they have a harvesting window
of up to 15 years, so asset holders can wait out bumpy periods until prices recover.
This isn’t to put down looking at ESG technology options. Some problems need new solutions. It might be using data to optimise fuel usage on container ships, developing new ways to reuse and extend the lifecycle of batteries, or safeguarding information
governance through blockchain applications. What forestry’s ongoing performance does show, however, is that for those investing in ESG, there is a range of opportunities out there.
Why more people need to have the opportunity to invest
One obstacle to ongoing ESG success is investor access. Forestry isn’t widely available in stocks and shares individual savings accounts (ISAs), or one of the other vehicles individuals can use to invest with. If you aren’t working for a hedge fund or are
an Ultra High Network Individual (UHNWI), opportunities are often limited outside of equities, exchange-traded funds and cryptocurrencies. Yet the appetite for alternative assets is certainly there:
younger investors are more likely to allocate more to alternative assets (up to three times) and less to stocks (by as much as half) than other generations.
Why should the industry care about broadening access to different types of asset classes? Because it allows more people to invest and creates more opportunities for companies to secure funding and backing. In turn, this will drive peers and competitors to
focus on their own ESG credentials.
ESG-focused investing will grow in the mid to long term as all sides realise the benefits. There will undoubtedly be bumps in the road. But as companies strengthen their ESG credentials, ESG-focused businesses continue to grow, and investors and end-clients
enjoy more ESG options, the demand for investment opportunities will flourish.