More people in the US are involved in the stock markets than ever before. If you have any retirement plan assets, like an IRA or a 401(k), chances are you have investments. For a growing number of investors, considering the impact of the companies in which they are investing is becoming a priority in selecting stock, mutual and exchange-traded funds to include in their portfolios and retirement accounts.
ESG investing involves a strategy that takes environmental, governance and social issues of companies and their impact into account. Sometimes also referred to as “SRI” or Socially Responsible Investing, the use of this strategy has grown significantly over the last several decades to not just screen out “bad actors” like fossil fuels, gambling, defense industry and alcohol, but to include in mutual and exchange traded funds and investor portfolios companies creating more diverse boards and C-suite leadership, environmentally friendly policies, operations and progressive workplace conditions.
There is a growing list of mutual and exchange-traded funds with the ESG focus, a trend that has been developing for more than 30 years. But the past 4 years and most recently the pandemic has accelerated their growth exponentially. According to the Banking Exchange on February 2, 2021 Bank of America’s ESG Matters – Quant Edge recently reported that additional investments in sustainable investment strategies in 2020 reached $255 billion, a new record. The report went on to say that 1,866 ESG equity funds saw inflows in 2020 of $194 billion, compared to $186 in outflows from other global equity funds. In other words, the additional amounts invested in ESG funds exceeded the funds taken out of non-ESG funds.
The article reported 141 new ESG funds were launched in 2020, most of them in Europe. In the fixed-income space, there was also significant growth: ESG bonds issued in 2020 exceeded $500 billion for the first time. Bank of America also reported that thus far 2021 is showing stronger inflow momentum for sustainable products, with global ESG funds experiencing $24 billion in inflows, one and a half times the pace of 2020.
Why all the increased investments in these types of offerings? One theory was cited as “…regulatory changes coming to the EU and a new presidential administration in the US” seeking to tackle climate change and address social change.
In a January 6, 2021 article on Livemint, the ESG inflows in 2020 were compared to inflows of $63.34 billion 2019 with “conscious investing” a key theme of 2021. They cited a BlackRock survey from December 2020 showing investors with $25 trillion in assets planning to double their ESG assets in the next five years. Climate-related risks were a top concern for 88% of those 425 investors responding from 27 countries.
A December 14, 2020 article in Forbes Why Socially Responsible Investing Is Likely to Gain Momentum Under Biden noted that sustainable investing has had more growth over the last four years than the previous 12, in part because US voters perceived the need to support endeavors that could positively address climate change and social issues if government was not so inclined. The article went on to say that the growth in sustainable investing now means that in one out of three investing dollars are being invested in this manner.
In addition to more investment activity increasing the amount of funds that have a socially-conscious approach, these investments outperformed their peers that do not have an SRI or ESG strategy. Bank of America’s analysis revealed that 65% of ESG indices outperformed equivalent traditional benchmarks in 2020. The outperformance of many tech stocks in 2020 as the pandemic drove innovation and demand while fossil fuel companies suffered from the continued growth of alternatives and reduced demand supported this relative outperformance, and could continue as a tailwind as the world emerges from the pandemic economy with a renewed emphasis on climate change awareness.
Ask your financial advisor about the options available for ESG investing that would suit your particular situation. You may find that the ESG strategy could support a plan of doing well, while doing good.