Sustainable investing
Excerpts from Bloomberg Intelligence's Sustainable Investing research
Sustainable investing moves mainstream on demand, policies
Sustainable investing has gone mainstream, driven by pension funds and millennial interest, with ESG integration overtaking ethical exclusions as the most popular strategy in 2020. Along with this, favorable policies and shareholder engagement are emerging as new drivers, which could sustain momentum. Though strategies focused on ethical exclusions might not aid returns, ESG integration could bolster them over the long term.
Bloomberg Intelligence analysis shows ESG indexes have room for long-term outperformance, driven by a tilt toward low-volatility and high-quality stocks. These tend to outperform during downturns but trail bull markets. Assets in ESG ETFs have increased exponentially, yet greater regulatory scrutiny adds a note of caution for funds.
Policy support, engagement rise as sustainable-investing drivers
Though pension funds and Millennials' interest remain the drivers of sustainable investing, renewed policy support, largely from Europe, and increased shareholder engagement could fuel growth. Yet increasing regulatory scrutiny over funds merits caution. Assets in ESG ETFs have been increasing exponentially, and climate strategies are likely to remain in focus.
U.S., Japan are growth avenues as assets reach $35.3 trillion
Variously labeled as sustainable, responsible, values-based or ethical investing, the field encompassed $35.3 trillion in assets at the start of 2020, a 15% increase from 2018, according to the Global Sustainable Investment Alliance. Pension funds' long-term investment horizons and asset managers' aim of capturing Millennials' interest are propelling growth. Policies in Europe like the Green Deal and EU Taxonomy support climate strategies. Though the region saw a decline in assets, that's attributable to a change in measurement criteria and, hence, not directly comparable.
ESG oversight continues to increase, adding a note of caution and potentially risking regulatory penalties and investments for funds.
ESG ETF assets increase 43% to $329 billion
ESG and values-based ETF assets crossed $329 billion in 1H, up 43% since December. While low-cost ETFs keep driving growth, rebranding funds as ESG strategies could be the next avenue for expansion. Such relaunches are accelerating, with at least 22 funds incorporating ESG criteria this year and 32 in 2020 vs. a maximum of two before last year. While flows decreased in 2Q vs. previous quarters, they remain historically high. A major reason could be asset managers moving their own ETF assets into these portfolios, which may not represent organic market demand. A broader investor base is needed to support expansion.
The ETFs consider ESG factors, employ exclusionary screens or have thematic focuses such as gender.
Millennials, women lead sustainability-investing value
The growing clout of Millennial and female investors may increase the emphasis on companies' sustainability performance, given apparent concerns among both demographics. Of groups surveyed, Millennials lead in terms of social-impact-investing interest and ownership at 77%. While the percentage dipped, 37% made such investments, following through on concerns, up from 28% two years ago. About 35% of baby boomers and men held similar views, based on a U.S. Trust survey of high-net-worth investors. Millennials may outgrow those sentiments, as their parents did.
Companies that lead their industries in ESG performance may have greater sustainability-focused investor appeal.
EU Taxonomy creates opportunities and risks
European asset managers may have the key to unlock sustainable growth, yet myriad challenges abound as regulators develop the "taxonomy," a tool that classifies environmentally friendly economic activities, with the latest rules emerging on April 21. Poor company reporting may lead to hefty investments in ESG data and research, while strict taxonomy adherence could restrict asset-allocation, leading to less capital diversification.