The rise of ESG investing across the world
Hi this Viram from Vested, and today we are going to be talking about the rise of ESG investing across the world.
Over the past decade, investors have started to give more and more importance to the non-financial impact of a company. And this charge has been led by one particular demographic called the millennials. A recent study done on millennials said that they are more likely to purchase a good from a product or trust a company if that company is actually environmentally or socially responsible.
In fact, the study even went on to say that 50% of millennials are likely to turn down a product which they perceive as environmentally or socially irresponsible.
Overall, the emphasis on the societal impact of a company has led to the popularization of this new way of investing called ESG investing.
So what exactly is ESG?
E stands for Environmental, S for Social, and G for Governance. This type of investing is also called sustainable investing. The goal for an ESG investor is to maximize financial returns along with the long-term positive impact of the company on the society as well as the environment.
ESG are the three factors that measure the societal and ethical impact of a company. Environmental factors as the name suggests relates to things in our surroundings – waste and pollution, deforestation, climate change are all different factors that are taken into consideration when looking at a company environmentally.
The second is social factors. This is related to how a company treats its employees and focuses on employee health and safety, diversity, working conditions and many more.
The last one is Governance and as the name suggests it focuses on the company’s corporate governance practices.
Next, let’s look at how you can invest in ESG funds via the US stock market.
As of December 2020, the amount invested in ESG funds today is at around $1.6 Trillion. 80% of this is concentrated in Europe while 13% has been invested via the US market.
Over time ESG investing has evolved. Early on, funds would just screen out undesirable companies like polluters or sellers of tobacco. But now companies and funds have developed sophisticated screens through which they can figure out the best and worst companies in terms of the societal impact that they have.
What started off as a few specialty funds offering ESG ETFs has now become a full blown movement. Today there are more than 350 ETFs and funds that offer ESG options in the US.
A couple of popular ETFs available in the market are:
Vanguard’s US ESG ETF (which goes by the ticker ESGV) or iShares offers another one called ESG SelectETF (which goes by the ticker SUSA). Combined both of these funds have about $7 Billion assets under management. Some of the companies that these funds have invested in are Blackrock, P&G, Apple, Tesla, and more.
Another interesting ETF is that iShares ESG Aware ETF. This one invests in large and mid-cap ESG companies in emerging markets that perform well in the ESG framework. So it includes companies like HDFC, Tencent, Naspers and Samsung.
Next, let’s look at how the ESG space in India is doing:
We are still in the early days of ESG investing in India. However, interest has definitely been increasing over time and that has led to a lot of mutual funds launching new ESG funds that invest in companies listed in India.
However, one of the key issues with ESG investing in India is to find companies with corporate governance. As we have seen in the banking sector fiascos in the past, even large listed companies are not immune from corporate governance issues. Also, unfortunately, environmental impact is often not taken into consideration when making key business decisions.
However, that has been slowly changing over time.
Lastly, we’ll look at the impact of COVID-19 on ESG investing:
Since the pandemic started, this type of investing has come into the limelight. ESG investing since the start of the pandemic has become more and more a priority for company decision-makers. Soon, ESG disclosures will become mandatory.
Countries and governments across the world have made climate change one of their top priorities. And companies too have set ambitious net-zero emission targets. Investors too are striving to reduce the carbon emissions from their portfolios. A testament to that is the fourth quarter of 2020 saw the highest ever flows into ESG funds at over $150 Billion. This was 88% more than the previous quarter.
As the world emerges from the pandemic, ESG investing will play a more and more important role. Now via easy access to the US markets you too can become part of this ESG movement and invest sustainably.
So, that was all on ESG investing, stay tuned for more.