Almost every day in the press, you will see stories about socially responsible investing. We invited Pinnacle’s Director of Quantitative Research and our go to guy for ESG investing Sauro Locatelli to help explain what it is and why it is growing in popularity.
Environmental, Social and Governance (ESG) investing refers to an investment approach in which a company’s environmental, social, and corporate governance policies and practices are considered alongside more traditional financial metrics. The table below provides a few examples of the types of considerations underlying each of the three categories.
ESG investing, also commonly referred to as Socially Responsible Investing (SRI) or sustainable investing, has been gathering impressive momentum globally. According to a recent report from Morningstar1, both the number of sustainable index mutual funds and exchange-traded funds available globally have more than doubled over the past three years. Assets have been pouring into these funds, which now control a record $1.06 trillion globally as of the end of June 2020.
According to a 2019 survey by American Century Investments2, 56% of US investors said they find appeal in impact investing, up from 49% in 2018 and 32% in 2016. There is reason to believe this trend will continue in the future with the younger generations expressing the most interest in sustainable investing. In fact, the same survey found that 72% of Millennials find appeal in the concept of impact investing, compared to 64% for Gen Xers and to 46% for Baby Boomers. Millennials are a large demographic representing 79.4 million people in the U.S. alone, and immigration could lead to an increase in this number to 81 million by 2036. This group is also poised to inherit a significant amount of wealth. A 2018 survey indicated that 87% of high net worth (HNW) millennials considered a company’s ESG track record an important consideration in their decision about whether to invest in it or not.3
While there is a lingering misperception that ESG considerations adversely affect financial performance, ESG investments have actually been outperforming their non-ESG counterparts in recent times4. For instance, during the first half of 2020, 72% of sustainable funds ranked in the top half of their Morningstar category. “The Covid-19 pandemic and movement for racial justice in the U.S. have kept attention on social issues, including workplace safety and diversity, and have likely added to interest in sustainable funds,” Morningstar’s report said. The unprecedented wildfires raging across the western USA are likely to spur increased investor concerns about environmental issues as well. An increasing amount of evidence points to financial markets starting to put a price on climate risk by punishing companies with greater carbon emissions through lower valuations5.
Pinnacle is excited to introduce its Clean, Green, Global series, which is available in both fully passive and hybrid active/passive versions – similar in design to Strategic Market and Dynamic Market, with ESG-focused ETFs replacing standard indexes where available and deemed appropriate.
1 https://www.morningstar.com/content/dam/marketing/shared/pdfs/Research/GSL_082520_Final.pdf
2 https://corporate.americancentury.com/content/dam/ac/pdfs/corporate/flyer/2019-impact-investing-infographic.pdf
3 US Trusts’ Insights on Wealth and Worth 2018
4 https://www.morningstar.com/articles/973590/us-esg-funds-outperformed-conventional-funds-in-2019
5 https://www.bnnbloomberg.ca/markets-are-putting-a-price-on-climate-risks-1.1357437
