Five reasons why the future of ESG investing is long term
Investor demand for sustainable investment funds that incorporate environmental, social and governance (ESG) factors is expected to grow sharply once again this year. Here are five reasons why we believe ESG investing is much more than a short-term fad.
1. Demand is led by investors
Over $500 billion flowed into ESG-integrated funds in 2021, contributing to a 55% growth in assets under management in ESG-integrated products1. We expect growth in ESG investing to continue through 2022, and well beyond.
The shift to sustainable investing is so powerful because it’s being driven by demand from the bottom up. Quite simply, investors – from individual savers through to large institutions – are directing an ever-increasing proportion of their portfolios towards sustainable strategies as they look to use their capital to help create a more sustainable world.
2. Technology is driving product innovation
New technology is helping fund managers keep pace with this sharp rise in demand for sustainable investments. The internet transformed the way information is captured, documented and disseminated, providing investors with access to more data than ever before. However, it’s only now, with the development of artificial intelligence (AI), that investors have the ability to analyse it all.
The result has been a dramatic improvement in corporate transparency, as new data sources provide better insights into how companies are being run from an ESG perspective. As fund managers use AI to tap into the “big data” revolution, new and exciting opportunities are being created across an ever-growing range of sustainable strategies.
3. Companies are being encouraged to take action
The good news is that many companies around the world already understand the need to take action on ESG issues—not least because they recognise that they can only deliver sustainable long-term growth if they manage the Earth’s resources prudently, treat their workers with respect and look after the natural environment in which they operate.
However, because the E, S or G issues that matter to one company will differ from those that matter to another, corporate engagement is vital if investors are to encourage companies to take action where the greatest impact can be achieved. Similarly, engaging with sustainable laggards to encourage change can be much more effective than simply divesting.
At the same time, governments continue to have a key role to play. Supportive government policy and coherent regulation can be vital to encourage companies to meet their ESG obligations and to also convince investors of the long-term viability of sustainable investing.
4. Investment research is increasingly focused on sustainable outcomes
ESG research frameworks are being developed and refined to support the growth in sustainable investment management. At J.P. Morgan Asset Management, we look to add value by ensuring that innovative product development, proprietary research and rigorous investment stewardship work together to deliver the ESG exposures that investors demand.
To help investors tackle climate change, for example, we have developed our own research framework that is based on the analysis of underlying raw data points. Our analysis identifies companies that are developing climate change solutions and those that are helping to enable the transition to a low carbon economy, all while still allowing us to engage with environmental laggards.
5. The energy transition is creating new risks and opportunities
As well as focusing on the ESG credentials of individual companies, investors are starting to give more consideration to the sectors, countries and regions that have the resilience and competitiveness to thrive as the world moves towards a low carbon future.
Resilience is about the readiness of sustainable portfolios to withstand the transition to clean energy and the impact of physical climate events as global temperatures rise. As well as asking which companies are best prepared, investors also need to look at whether the countries in which they invest have the reserves to endure the pain of energy transition and to pay for the adaptation to a low carbon economy.
Competitiveness is about the commitment of governments to deliver a transformation in their economies so that businesses are not left behind by higher carbon prices globally. Cutting carbon emissions will require significant growth in carbon markets, and this growth will be a key influence on competitiveness. Countries that are able to take advantage of the advances in technology needed to reach net zero carbon emissions will be best positioned to flourish in this environment.
Sustainable investing is here to stay
Increasing investor interest, a sharper corporate focus and a significant improvement in data provision are all set to further support the growth in sustainable investing. There remain obstacles to overcome—both in terms of investor acceptance and corporate adoption—but with new ways to capture sustainable returns being developed, and with many more companies committing themselves to sustainable business goals, it’s easier than ever for investors to mitigate ESG risks in their portfolios while contributing to positive change.
1Source: Morningstar, USD as of 31st of December 2021. Includes all open-end funds and ETFs domiciled in Europe, excluding money market funds. Morningstar Filter: Sustainable Investment-Overall = Yes.