19 July 2021
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4 min read
ESG investing continues to grow worldwide
environmental, social and governance (ESG) cover investment approaches for more than a third of global assets, Global Sustainable Investment Alliance claims
Sustainable investment in the major financial markets globally has grown to $35.3trn and now represents 36 per cent of all professionally-managed assets across the United States, Canada, Japan, Australasia and Europe, a new report today shows.
Global sustainable investment reached $35.3trn, growing 15 per cent in two years and in total equating to 36 per cent of all professionally-managed assets across regions covered in the report.
Many regions experienced strong growth in sustainable investment assets under management - with Canada experiencing the largest increase in absolute terms over the past two years (48 per cent growth), followed by the US at 42 per cent, and Japan at 38 per cent.
Factors cited in the report as driving the growth of sustainable investing include growing uptake of the climate risk guidelines developed by the Taskforce on Climate-related Financial Disclosures (TCFDs), and the increasing influence and reach of the UN-convened Net Zero Asset Owner Alliance, where 32 of 42 groups of institutional investors are headquartered in Europe and together represent $6.6tr in assets.
Other regions are slowing down their rate of growth or have seen a reported reversal - in particular Europe and Australasia - however. In both cases, the report said it is largely due to changes in how sustainable investment is defined, the report explained.
In the EU, there was a decline in absolute terms over the period of 13 per cent, owing to revised definitions of sustainable investment that have become embedded into legislation as part of the European Sustainable Finance Action Plan, according to the report. Meanwhile, in Australasia, growth has been affected by the tightening of industry standards, it said.
The US and Europe continued to represent more than 80 per cent of global sustainable investing assets during 2018 to 2020. The proportions of global sustainable investing assets in Canada (seven per cent), Japan (eight per cent) and Australasia (three per cent) have remained relatively unchanged over the past two years.
In Europe, the sustainable and responsible investment industry experienced strong demand from retail investors in the first half of 2020, as evidenced by net inflows of €14bn into EU-domiciled ESG equity funds in contrast to net outflows of €77bn from other equity funds. The consistent outperformance of ESG indices over the past few years has also increased the ESG product offers to the retail market.
"The Global Sustainable Investment Review 2020 demonstrates that sustainable investment is a major force shaping global capital markets and, in turn, is influencing companies and others seeking to raise capital in those global markets," said Simon O'Connor, chair of the GSIA. "This growth is being fuelled by rising consumer expectations, strong financial performance and the increasing materiality of social and environmental issues - from biodiversity to racial equity to climate change."
The most common sustainable investment strategy is ESG integration, with a combined $24.6trn in assets under management employing an ESG integration approach, also being the most commonly reported strategy in most regions, the report states. The next most commonly deployed sustainable investment strategies include negative/exclusionary screening ($15.9tr), followed by corporate engagement/shareholder action ($10.47tr).
Additional market insights in this year's report also shows the UK is seeing new funds being launched to specifically address biodiversity-related risks and opportunities. Retail savers and other clients' demand for sustainable and responsible investment products and funds is rising in the UK, it said, and the industry has been taking steps to help meet this demand.
In the latest publicly available figures for April 2021, the Investment Association's monthly fund figures showed responsible investment funds recorded net retail inflows of £1.6bn, with responsible investment funds under management standing at £72bn.
There has been limited research to demonstrate retail thematic preferences across the UK, though a survey by Morgan Stanley in 2017 found that 86 per cent of millennials say they are interested in sustainable investing and are twice as likely to invest in companies targeting social or environmental goals, compared to the overall population.
A version of this article originally appeared at Investment Week.
