The Booming ESG Investment Market is Here to Stay

Sustainable and socially responsible investing may have once been seen as niche or a nice-to-have. But in 2021, it is clear that virtue (or ESG) makes sound investing sense. ESG is something investors can no longer afford to ignore, as reflected by the ever-expanding number of managed funds that now explicitly invest based on environmental, social and governance (ESG) criteria.

Environmental, social, and governance (ESG) criteria are, in essence, a set of standards for a company’s operations that socially conscious investors are now putting into action to screen potential investments.

• Environmental criteria look at how a company performs as a steward of nature. How does it handle air or water pollution arising from its operations? What is its attitude toward climate change? What about sustainability efforts in its supply chain?

• Social criteria delve into how it manages relationships with employees, suppliers, customers, and the communities in which it it operates. What are its policies regarding LGBTQ+ equality, racial diversity and inclusive hiring practices? How does a company advocate for social good in the wider world, beyond its limited sphere of business?

• Governance criteria take a hard look at a company’s leadership, including executive pay, audits, internal controls, and shareholder rights. How does the company’s board and management drive positive change? Does the board foster diversity in leadership? Are its interactions with shareholders positive?

Why is ESG on the rise?

The ESG boom is linked to powerful trends that the pandemic has fuelled such as sustainability, demographic development and technology. ESG-themed investments saw strong performance and an influx of flows in 2020. The result is that they are expected to be a key driver of organic asset growth for money managers in 2021, according to a report by Moody's Investors Service.

The New York-based ratings agency's report Funds & Asset Management – US: ESG investment outperformance overcomes investor hesitancy, a key barrier to growth shows that inflows into ESG strategies grew 140% in 2020 from the year before. Before 2020 and the pandemic, ESG investments might have met with investor resistance due to the assumption that ethically motivated investing — avoiding fossil fuels, for example — meant investors had to sacrifice profit and returns.

Many investors (especially the Millennial generation) may have already been willing to give up some of their returns for known environmental and social benefits. But now they do not have to… More than half of the ESG-linked funds outperformed the S&P500 in the first months of 2021, according to S&P Global Market Intelligence data. It is clear that the investment sector has now understood that a company cannot be understood merely through its financial performance. Firms are now increasingly eyeing reputation and stakeholder engagement and actively integrating ESG factors into their long-term investment processes and perceiving ‘sustainable investing’ as a wise risk mitigation strategy.

Top 5 ESG funds

The best funds are empowering investors to support responsible corporate behaviour without sacrificing performance or incurring excessive fees.

Listed below are our top performers.

• Vanguard FTSE Social Index Fund (VFTAX) with a 10-year return of 15.6%
• iShares MSCI USA ESG Select ETF (SUSA) with a 10-year return of 14.0%
• Parnassus Core Equity Investor (PRBLX) with a 10-year return of 14.5%
• iShares Global Clean Energy ETF (ICLN) with a 5-year return of 23.6%
• Shelton Green Alpha Fund (NEXTX) with a 5-year return of 21.6%