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ESG: What is it and how is it driving trends?

Standing for ESG (Environmental, Social and Governance); they are a set of non-financial factors, that are being increasingly applied by investors as a part of their analysis to identify growth opportunity and material risk. This is done by screening for criteria to ensure that companies are environmentally conscientious, pro-social and have a good corporate governance.
ESG Investment Growth

Research of a variety ESG firms at Fidelity showed between 1970 and 2014, ½ of them beat the market and only 11% performed poorly. Further research at Blackrock indicated that during the peak of Covid-19 8/10 of their sustainable investment funds outperformed their non-ESG portfolio counterparts. The performance of these portfolios and investments has only driven the growth of the use of these criteria. This has been backed by analysis at Broadbridge Financial Solutions, which has indicated ESG assets will reach US $30 trillion by 2030.

There have also been indications that ESG funds are considerably less volatile, whilst also have good equity returns, therefore making them have a longer lifespan. 77% of those that emerged 10 years ago are still active in comparison to the 46% of conventional funds.

The global growth in ESG conforming assets has only been spurred by events in recent years, a key one of which was the 2015 Paris agreement. This international accord was a legally binding agreement to ensure the countries involved would actively try and combat climate change. Primarily through long term low greenhouse gas emission development strategies which were supposed to be formulated by 2020.

What trends have appeared?

Infratech: Due to the pandemic and climate change there has been a greater need to ‘build back better’ as these events have showcased critical flaws across sectors, as a result governments are making it a priority to create resilient and critical infrastructure. These targets can be achieved by integrating blockchain, metaverse and distributed ledger technologies (DLT’s). Hence providing the opportunity for investors to buy shares in companies that work in asset tokenisation, data centres and smart infrastructure. There is expected to be a focus on the ESG implications, for example the affect blockchain technology, as something that is energy intensive,  has on the environment. As well as greater scrutiny on the use of personal data, and the implications this data can have in the wrong hands. 

Increased regulation: Market trends out of Europe are indicating an increased use of ESG regulation, therefore there will probably be some regulatory change across APAC and the US. Investors will need to keep a watch on these developments to work out how to navigate this new landscape.

Supply chain: Net zero emissions targets are becoming typical for financial investors; hence it’s becoming necessary for people in the supply chain to also adhere to those targets. Short-term disruption of the supply chain may arise, as amendments will be needed, for example if some part do not follow ESG constraints or is not financially viable. However, this will yield more M&A opportunity in supply chain management.  

This poses the question: Are ESG initiatives here to stay?                               

I believe that they are. Climate change will continue to affect the worlds socio-economic standing, and consequently is going to always have an affect on the global market. If ESG firms are profiting without volatility, they will continue to bring in more investment. 

Analyst: Saffron Bloxham

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