ESG (environmental, social, and governance) investing continues to witness astonishing growth, thanks to the emergence of more conscientious investors. CNBC wrote in December of 2019 that the ESG market “grew to more than $30 trillion in 2018, and some estimates say it could reach $50 trillion over the next two decades.”
According to CNBC, U.S. gross domestic product was running at $21.2 trillion in Q3 2020. The ESG market potentially witnessing $20 trillion in growth over the next two decades is akin to another America in terms of economic size – a development that could create thousands of new investment opportunities should it come to fruition (and also eliminate some).
Covid-19 Spurs Greater Interest in ESG Investing
In June of this year, Pippa Stevens from CNBC argued that “Covid-19 could prove to be a major turning point for ESG investing.” The record inflows into U.S. sustainable funds in Q1 2020 appears to support her claim.
ESG Market Sees Record Inflows Despit Covid-19
We all remember how tumultuous Q1 2020 was as many major global indices crashed by 30% or more. It was a slightly different story for ESG funds, however…
“Global sustainable funds saw inflows of $45.7 billion [in Q1 2020], while the broader fund universe had an outflow of $384.7 billion. . .”
This is a telling stat that reveals the resilience of ESG funds. Despite the market volatility introduced by Covid-19 this year, investors were still willing to deploy capital into socially responsible investments.
What’s more, momentum for sustainable funds continues to build. ESG Investor wrote in late October,
“. . .demand across all markets [contributed] to net inflows of US$80.5 billion [in Q3 2020], according to Morningstar.”
“. . .inflows in all major markets contributing to a new high of US$1.2 trillion in total ESG fund assets.”
With sustainable funds seeing inflows of $45.7 billion in Q1 2020, $71 billion in Q2, and $80.5 billion in Q3, net inflows for ESG funds are increasing dramatically quarter over quarter. It would not surprise us to see quarterly inflows into ESG funds top $100 billion by early next year.
It’s worth noting that President-elect Joe Biden announced Brian Deese will lead the National Economic Council (NEC) for his administration. This is a critically important role as the NEC crafts much of the country’s broad economic policies. Brian Deese worked for Obama for 8 years as deputy director of the Office of Management and Budget and was instrumental in helping create the Global Climate Change Agreement in Paris in 2015. What’s more, Deese is currently the Head of Sustainable Investing at BlackRock.
Politics impacts sector momentum — both positively and negatively. Deese filling such an important role at the NEC will no doubt be a positive for ESG investing.
The Link Between Covid-19 and ESG Investing
If there is indeed a connection between Covid-19 and the growth of ESG investing, it’s important for investors to understand why. One plausible explanation comes from JPMorgan, which suggests that it could be because the pandemic is magnifying the importance of social responsibility.
“‘The rebound in civil society has been impressive, with an increase in volunteering, social cohesion, community support and focus on public good vs. private freedoms,’ JPMorgan said in a recent note to clients. ‘We see the Covid-19 crisis accelerating the trend to ESG investment.'”
And as civilians embrace social responsibility, so too are some of the world’s largest companies.
“The pandemic has demonstrated the commercial relevance of ‘E’ and ‘S’. We have seen many examples of companies sacrificing short-term profits to respond to the pandemic and this being rewarded by an increase in the firms’ values. For example, Amazon sacrificed US$4bn of earnings to invest in its customers and employees, and was rewarded with an increase in its market cap. The same was seen at AstraZeneca when the company committed to supplying a potential vaccine on a no-profit basis.”
But despite the advantages of ESG investing and the momentum it has built to date, the future of the ESG market is far from certain; for it to continue to grow, investors and corporations will need to abandon shareholder capitalism in favour of stakeholder capitalism.
Abandonment of ‘Shareholder Capitalism’ Holds Key to ESG?
“Professor Klaus Schwab, the founder of the World Economic Forum, has called for the abandonment of both ‘shareholder capitalism’ and ‘state capitalism’, which have proven to be incapable of meeting the world’s challenges. He suggests that a ‘stakeholder capitalism’ – a term he coined in the early 1970s – would enable a ‘Great Reset’ of the global economy.”
For many investors and executives, the thought of prioritizing stakeholder interests over shareholder value is untenable, if not outright disastrous. There are still those who blame the stakeholder capitalism model for the poor corporate performances and depressed valuations seen in the 1980s. It’s a model that remains the subject of fierce debate today and, as such, will be one of the biggest barriers to the growth of ESG investing.
The Future May Belong to ESG Investing
Covid-19 has awoken the world to mindful investing. The substantial inflows into sustainable funds this year suggest that ESG investing is not a fad or short-lived trend, but a movement. However, while the future of ESG investing looks promising, its continued growth will depend on the willingness of investors to align growth expectations with the interests of employees, suppliers, and communities.
It’s a big ask, given how far shareholder capitalism has taken us to date…
All the best with your investments,
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