5 powerful reasons to consider ESG investing as part of your financial strategy

No doubt 2020 will be etched in your memory for a very long time, as the impact of Covid-19 has been felt by just about everyone across the planet.

But, if you are an investor, 2020 might have been a seminal year for you in a different way. You may be one of the many investors who decided to put money into “sustainable” investments.

While sustainability issues have been creeping up the political agenda for years, it has also become increasingly important to investors. But, with the outbreak of Covid-19 and countries working hard to prop up economies in the wake of the pandemic, many wondered if responsible investing’s journey into the mainstream would be put on hold.

The reality, though, has been quite the opposite, with investments into sustainable funds soaring last year. According to CNBC, investment analysts Morningstar reported £37.8 billion worth of net new money went into sustainable funds – better known as “ESG funds” – in 2020.

That’s more than double the £15.2 billion invested in ESG funds in 2019.

Read on to learn more about ESGs, why they are becoming more mainstream and what the future might hold for them.

1. ESGs are moving from a niche investment to mainstream

Originally known as “ethical” or “sustainable” investments, ESG funds – which stands for “Environmental, Social, and Governance” – aim to put your money in investments that offer potential growth, but in a way that is more socially aware.

To achieve this, asset managers consider the environmental, social and governance factors within a fund before deciding to invest.

In the past, ESG was seen as a niche area of investing, as being ethical wasn’t seen as a priority.

That started to change when climate change, plastic pollution and ethical practices began to attract media attention, creating demand for more ethical and sustainable investments. Then, asset managers had to take notice and make them more mainstream.

2. ESGs have performed well during the Covid-19 pandemic

As coronavirus spread worldwide early last year and nations retreated into lockdown, media reports started surfacing of nature reappearing.

Venetian residents witnessed the return of wildlife to their tourist-free city, and the BBC reported carbon monoxide had reduced by nearly 50% compared with last June.

So, perhaps it’s not surprising that the issue of sustainability suddenly moved to the top of people’s agenda, and that might be the case for you.

If it is, you are in good company: a report by FTAdviser shared data from the Investment Association that showed inflows into ESG funds quadrupled between January and November 2020.

The graph below, by the Morgan Stanley Institute for Sustainable Investing, shows returns for US sustainable and ESG equity funds outpaced traditional funds by 4.3% in 2020. ESG bonds also provided returns 0.9% higher than the traditional bond fund.

Remember though, that this is no guarantee of future performance, and you should always speak with a financial planner.

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Source: Morgan Stanley Institute for Sustainable Investing

The criteria used for ESG funds could be why they performed well in 2020

Experts have suggested this performance might be because of the industries the funds are typically invested in.

As ESGs are unlikely to be exposed to energy companies and airlines, it meant they dodged much of the financial pain experienced by the energy and travel sectors during the pandemic.

Alongside this, many ESG funds concentrate on markets like tech or pharmaceuticals, which have performed relatively well during coronavirus.

3. Coronavirus highlighting social issues may bode well for the future of ESGs

A recent article in the Financial Times suggests that ESGs could be about to benefit from another, unexpected concern society is now raising.

It reports that Covid-19 has shifted investors’ focus onto social issues, such as how companies treat their staff and suppliers. This, the article suggests, could have an impact on how you and others decide to invest money in the future.

In the report, Sébastien Thevoux-Chabuel, a portfolio manager at international asset management group Comgest, says social factors such as employee rights and treating suppliers fairly are fast becoming as important to investors as the environment.

“Now the ‘S’ [in ESG] is coming to the fore,” he says.

4. Joe Biden prioritising climate change may also help ESGs in the future

Jon Hale, director of sustainable investing research at Morningstar, told CNBC that US President Joe Biden’s commitment to focus on climate change could provide “a tailwind” to ESGs. He also said investors’ enthusiasm for ESG funds may be because it provided an opportunity to make a difference.

“They [investors] have these sustainability concerns and are starting to realise we can address those through our investments,” he told CNBC.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation which is subject to change.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

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