Top 2021 ESG Investing Trends: Greener Pastures Lie Ahead

Top 2021 ESG Investing Trends: Greener Pastures Lie Ahead

...but only if we come up with a more well-defined, transparent rating system for ESG investors.

Oct 14, 2021

Top 2021 ESG Investing Trends: Greener Pastures Lie Ahead
Impact Investing

Impact Investing

Sustainability

Sustainability

Beginners

Beginners

Sustainable investing has branched out from the niche corner it used to occupy in the investing world. As ESG investing trends upward, "going green" with your green is now so mainstream that it's an integral part of many everyday investors' portfolios.

As of 2020, sustainable investing now makes up over one-third of global assets, according to the latest report from the Global Sustainable Investment Alliance. The growth of this investing style has taken place rapidly and recently—it saw a 55% increase between the years of 2016 and 2020. In total, $35.3 trillion in assets are now invested sustainably.

The definition of sustainable investing is a broad umbrella that includes everything from ESG investing to negative screening, shareholder action, and sustainability-themed investing. Environmental, social, and corporate governance (ESG) investing—which is investing in companies with high ESG ratings, a system that takes into account a company's environmental and social practices—is the most common. This is followed by negative screening, which is the process of eliminating companies that perform poorly on ESG ratings from a portfolio, although there's been a recent shift away from this and toward ESG integration.

Many people are now calling ESG the future of investing. While it's certainly in vogue, this style of investing has some serious obstacles to overcome if it wants to become the gold standard. Here are the biggest 2021 ESG investing trends and what's on the horizon for this trending sector.

Retail investors, especially millennials, look for purpose beyond returns

Sustainable investing may have started as a trend amongst institutional investors, who have access to a wider range of alternative investments than your average retail investor, but it's now become a household name. 

An astounding 85% of individual investors are at least interested in sustainable investing, according to a study done by Morgan Stanley. This trend is most prevalent, perhaps less surprisingly, among millennials—95% of them are interested in "green-ifying" their portfolio. Plastic reduction and climate change are primary concerns, followed by community development and a circular economy, an economic model that focuses on sharing, reusing, and recycling goods.

When it comes to putting their money where their mouth is, many retail investors are understandably still behind, but that's changing. When the Global Sustainable Investment Alliance started reporting in 2012, institutional investors accounted for 89% of sustainable investing with only 11% coming from retail investors. As of 2020, retail investors account for 25% of all assets in sustainable investing.

Racial justice and social issues are now a leading concern

While climate change is still a primary driver, there's been an increasing focus on racial justice and socially responsible investing in recent years—particularly in the wake of the George Floyd protests and the #MeToo movement. A relatively new branch of socially responsible investing, racial justice investing seeks to add companies that are Black-owned, promote racial justice, or feature a racially diverse C-suite to investment funds and portfolios.

This has also translated into a greater concern for investors regarding a company's political stances and diversity and inclusion practices. In fact, the leading ESG concern stated in shareholder proposals from 2018 to 2020 was corporate political activity, followed by labor and equal employment opportunity, and then climate change, according to the 2020 US SIF Trends Report.

However, issues with verifying environmental claims extend to the social sphere as well. Quantifying racial justice and equity can be even harder than quantifying something like carbon footprint, and the lack of a standardized rating system makes it easy for companies to make unsubstantiated claims. There's little in place, currently, to help investors clearly identify companies that have implemented real systemic change.

Greenwashing and loose ESG criteria threaten to slow the upward trend

As consumers began to care more about the environmental and social practices of the companies they buy from, demand for products that comply with ethical standards like organic or fair trade grew. Brands recognized the money they could make from "going green," and these various labels became marketing tools. From there, greenwashing—when a brand or product markets itself as environmentally friendly without making any real, impactful changes—became standard practice.

Many claim the same is happening to ESG investing. There are no clear, objective standards for ESG ratings—many rating systems exist, and the definition is still unclear. It's still fairly easy for a fund or company to obtain a decently high ESG rating without actually being all that environmentally friendly. For example, plenty of ESG funds still invest in fossil fuels, holding shares in companies like Exxon Mobil Corp. and Chevron Corp., but they're able to brand themselves as ESG by holding less in those sectors than a traditional fund would. While this does technically lower the "carbon footprint" of the fund, it makes little real-world difference.

As Kenneth Pucker, sustainable investing Senior Lecturer at Tufts University's Fletcher School and Advisory Director at Berkshire, put it in a recent opinion piece for Institutional Investor, "Investors are finally taking ESG investment seriously. But as currently practiced, most ESG investing delivers little to no social or environmental impact."

As these concerns grow louder, the call for a clearly defined rating system that can truly hold companies and funds accountable does too. It's a lot easier to measure a company's financial performance than its environmental and diversity practices, but if ESG investing is going to become the future of investing rather than a passing trend, transparency will need to improve in the coming years. This is just now becoming possible as organizations gather more quality data around ESG practices, but it remains to be seen whether this will translate into a more effective and standardized rating system.

Know Your History

ESG investing has evolved a lot since its inception, and plenty of changes are still to come. When did ESG investing start?

Know Your History

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