I was recently asked to produce a video for the “Unique Manager Showcase” series to answer the question “Is ESG investing a fad?”
Having run ESG-related portfolios for over four years – originally badged as Ethical Emphasis but subsequently rebranded Sustainable World to better reflect their sustainability focus – the PortfolioMetrix view is this is an important investment option that is here to stay.
During 2020 ESG funds benefitted from a major tailwind (they had little exposure to poorly performing oil companies and airlines) and we saw many investment managers quickly putting together their own portfolios to meet demand.
In some parts spurred by the unique events of 2020, ESG investing has become the hot topic that has dominated the adviser industry media for the past 12 months.
The question is, has this rapid growth in interest created a bubble that will burst in the not-too-distant future?
I don’t believe so. Here are three reasons why:
Many people have had a major awakening to the impact humans are having on the planet. The emergence of Covid-19; the negative impact plastic is having on the planet; high profile activists such as David Attenborough and Greta Thunberg constantly reminding us that the world is in a perilous place – all of these factors are making us think and re-evaluate how we can make a difference.
Big business is waking up to the change in agenda. In 2019 the Business Roundtable, a non-profit organisation whose membership is made up of the chief executives of major US companies produced a statement signed by almost 200 CEOs, including Jeff Bezos of Amazon and Jamie Dimon of JP Morgan, supporting a move away from the concept of shareholder primacy to one focusing on all stakeholders. It formally recognised that business owes a commitment to employees, customers, suppliers and communities (including the environment) as well as shareholders.
Being wealthy is less appealing when the world is sick. This doesn’t mean that every investor now wants their money to fuel a better world come what may. The latest ESG Tracking Study from NextWealth highlights that investors still want to see good returns but says: “There is widespread demand among consumers to do no harm and a growing desire to do good.”
As we’ve found with our four years of ESG-related portfolios, it is possible to opt for investments that are more focused on ‘doing good’ rather than ‘doing harm’ and still enjoy a healthy return. Obviously past performance is just that – in the past and no-one has a crystal ball, but I think we should be optimistic that ESG investing (if done well) can meet investors’ financial goals as well as help to build a world they actually want to live in.
For a comprehensive look at the topic of ESG, including how we got to where we are today, what the terminology means and how to structure conversations and portfolios to meet individual client needs, check out the free-to-download PortfolioMetrix white paper: ESG; everything you wanted to know but were afraid to ask.