Sustainable investing, ESG integration and impact investing are all distinct in their aspects but have one thing in common. And that is the prerequisite knowledge for future investors as it grabs the focus of the entire ecosystem, including investors, asset managers, and stakeholders.
Here is a list of the ten critical reasons why ESG and sustainable investing will stay.
1. ESG Offers a Fuller View of Risk
Risk is an unavoidable element of investing, and assessing it has become quintessential for fiduciaries. A complete information set of the possible risks is needed. And an augmenting traditional investment analysis with ESG information provides that.
It addresses issues of evident material concern to companies and investors today, including climate, pollution, the mistreatment of workers, respect for customers, supply chain oversight, and brand reputation.
These risks matter. And no one would invest in a company that ignores or recognises the threat and finds a backup supply chain.
2. Identifying the Risks Leads to Opportunities
Risks are the same for savvy companies. The best part about risks is that they bring opportunities, another reason ESG is becoming entrenched in mainstream investing.
ESG serves as the framework to grab opportunities as the economy blossoms.
Most investors invest in such savvy companies because they know that it is a long-term deal.
3. Stakeholder Capitalism is Good For Companies
Companies are getting ready to accommodate talented workers and customers who are after what they offer.
Companies do so to establish loyal relationships over the long term, ultimately enhancing company value.
This is called stakeholder capitalism, and it is suitable for shareholders, too.
Publicly-traded companies also incorporate ESG metrics to track their progress.
4. Regulations Are Leading to Improvements
Regulations address ESG issues, meaning disclosures and fund managers’ literature will also improve. In addition, central banks are now aware of the risks of climate change to the global economy. And they are considering how to add ESG bonds to their reserves.
The US Securities & Exchange Commission has set standards and proposed rules for companies on climate reporting. Other laws would require fund managers to disclose additional information on ESG in official fund documents and need funds with specific names to invest a significant portion of their assets in investments suggested by that name.
Concerning fund names, they must reflect their ESG practices. There has to be no connection between a prospectus and its holdings.
One possible outcome of this rulemaking is that it will give large asset managers an excellent opportunity to dominate fund flows.
5. Sustainable Investing is Growing
Funds about ESG information integration, sustainability themes, or impact assessments have garnered huge assets.
The potential looks even more significant as many investors are adopting ESG. In addition, principles for Responsible Investment were backed up by many signatories to the United Nations.
With aims to incorporate ESG factors into investment decisions, it had increased to represent $121.3 trillion in assets, up from 890 signatories and $24 trillion within ten years.
6. Significant growth among the Female Population
Many individual investors are making sustainable preferences with their investment decisions. And many are interested in buying sustainable investment funds.
As for the younger population, the numbers are much higher. They will be the ones that will have to suffer the consequences of climate change in the upcoming years.
In a survey of US individual investors, 79% in the above 18 age group were interested in sustainable investing. And 99% of millennials will benefit from an estimated $30 trillion wealth transfer.
7. Performance is on Par
Sustainable funds prove that they can perform on Par with traditional funds. Until now, sustainable funds generally outperformed their conventional counterparts.
So far, in 2022, broad indices have been lagging due to the strong performance of fossil-fuel-based energy.
However, compared to other funds with similar overweights, these funds are holding up well in this year’s bear market. For example, large-growth funds in Morningstar’s US Sustainable Funds Landscape lost 30.8% for the year through September, compared with 32.1% for the large-growth Morningstar Category average.
8. More Shareholders Are Voting
Sustainable funds show that they can help create positive ESG outcomes through engagement and proxy voting. This is the excellent untold and still unfolding story of sustainable investing.
Many investors need to realize how many sustainable funds undertake active ownership activities.
Direct indexing will also allow individuals to vote for their underlying shares. But more than that, voting for one’s values is becoming easier.
Apart from these actions, increased flows into funds using ESG information impact corporate behaviour. Any amount of investment that goes into ESG investments contributes to the fact that companies are pursuing greater sustainability.
9. Difficulty with a Broad Consensus
Reversing ESG’s momentum is hard. The standard view is that ESG issues are not tangible. However, though it is a topic of debate, there is a broad consensus that ESG issues are indeed material.
10. ESG for best Investor Outcomes
The impact of ESG depends on the investors’ rights. It also reflects in their desire to increase their commitment to their investments. This will increase investors’ potential and willingness to stick with their investments.
Conclusion
The sustainable investing market keeps growing significantly, with the demand for sustainable investment strategies surging. So this has led some of the world’s leading investors to be the forerunners in adopting sustainable investing strategies.
Many significant funds seek to develop their sustainability strategies and practices, regardless of where they must start. At the same time, others need help defining their approach to ESG.
The methods already used to select and manage portfolios are highly compatible with sustainable strategies, and close integration can have significant benefits for institutional investors and beneficiaries alike. Diligen has an experienced team that can help you run your business accounts better. So, when do you plan to get started?
