The Main Drivers for ESG Investment - Nick Whittle

Photo by Tyler Casey on Unsplash

On March 10, Marcus Lu of visualcapitalist.com published a set of graphics and data visualizations about current motivations for US investors to place their funds in ESG assets. ESG-related assets have grown 42% between 2018 and 2020 to reach $17 trillion, and now represent 33% of total U.S. assets under management, so it is instructive to look at what the drivers that are underpinning this shift in investment focus are and to see how this translates internationally.

Marcus highlights that a 2019 survey by Morgan Stanley of U.S. investors, found that an eye-popping 84% want to be able to tailor their investments to their values, while 86% believe that companies with strong ESG practices are more profitable. The survey defines the three main drivers for ESG investment as ESG integration; incorporating personal values; and making a positive impact. Let’s look at each of these in turn.

ESG Integration:

Investors believe that a proactive approach to ESG improves long-term portfolio performance, and invest in companies that lead their sectors in ESG practices. A comparison of index performance would appear to bear this out: the smaller MSCI ACWI ESG Leaders Index of ESG leaders in each sector (1,170 component companies versus 2,982) has outperformed its standard counterpart, the MSCI ACWI Index of large- and mid-cap stocks across both developed and emerging markets, by 7.9% between December 2007 and December 2020.

Incorporating Personal Values:

Investors screen exposure to specific ESG issues to align investment decisions with personal values. Companies that have exposure to specific ESG issues, such as weapons, tobacco, fossil fuels, or deforestation, or which do not comply with United Nations Sustainable Development Goals, are excluded from consideration.

Making a Positive Impact:

MSCI’s survey found that plastics reduction and climate change are currently the top two ESG investment themes. The desire to make a positive impact through one’s investments is a powerful driver, whether that is through the support of gender diversity, such as companies in the MSCI Women’s Leadership Index, or investment in Green Bonds for environmental projects.

The message for emerging market’s issuers and investors is clear. Issuers need to continue to up their game in ESG practices, and investors can accelerate this process by rigorous application of and adherence to ESG principles in their portfolios.

You can read visualcapitalist.com’s report by clicking here, or follow the links above to find the underlying research from MSCI.

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