Environmental, Social and Governance (ESG) factors have emerged as a dominant framework for assessing the long-term sustainability of an organisation.
As of February 2018, €372 billion was invested in ESG strategies in cross-border and domestic Europe, according to finance industry servicing company Broadridge, up from €132 billion in 2010.
The evidence has never been clearer that investing in companies with strong ESG credentials is on the rise and set to stay. At Tern we believe this is for a number of reasons which are covered in our latest blog, here are our top six.
Climate change is a reality.
Pressure from investors looks set to intensify as concerns over climate risks escalate. A report from consultancy, Mercer, argues that there is an urgent need for investors to step up their support for companies and projects that are compatible with the COP21 Paris Agreement's goal of keeping temperature increases below 2C or risk significantly worse returns as climate impacts intensify.
Helga Birgden, global business leader at Mercer says "A 2C scenario leads to enhanced projected returns versus 3C or 4C and therefore a better outcome for investors. It's an opportunity, since although incumbent industries can suffer losses in a 2C scenario, there are many notable investment opportunities enabled in a low-carbon transition. The modelling shows that greater inclusion of sustainable assets into portfolios can enhance returns."
Social media and the 24-hour news agenda
We live in an ‘always on’ world with a constant flow of information. It’s no longer possible to sweep aside company’s misdeeds hoping the media wouldn’t notice. Social media gives everyone a platform for whistleblowing and a tweet can be on thousands of investor feeds within minutes with the possibility of sparking outrage, backlash and boycott.
Demographics are changing
Millennials and Generation-X are increasingly taking over from Baby Boomers in positions of influence, changing business, financial and political landscapes. Increasing interest in ‘sustainable investing’ is being driven by millennials. A 2019 Morgan Stanley Institute for Sustainable Investing survey of high net worth investors found that 95% of millennials were interested in sustainable investing.
We are generally living longer
By 2050, there will be 2.3 billion people in the world over age 65, according to the United Nations.With average life expectancy rising in developed countries, sustainability issues won’t just affect our children but also our older selves. Climate change, healthcare and corporate governance are set to affect our finances in retirement.
ESG linked to better performance
Increasingly, institutional and individual equity investors have made the link between ESG information, a company’s purpose, values and strategy and its performance. A growing body of research indicates that companies with better environmental, social and governance standards typically record stronger financial performance and beat their benchmarks.
Moving beyond the regulatory requirements
A heightened regulatory environment has in turn increased ESG requirements and accounting standards resulting in transparency around disclosures in financial statements.
Successful organisations ackowledge that regulatory requirements are a starting point. To deliver strong returns over the long term, it is necessary to be proactive and to exceed compliance to create a far reaching ESG framework. That’s why they are joining forces and forming organisations such as One Planet Sovereign Wealth Fund.
Together these factors are fuelling the rapid growth of ESG investing. It’s a trend we think will continue for some time.