Growth of ESG-related investment products available to institutional and retail investors has surpassed $1 trillion
Environmental, Social, Governance (ESG) factors as the core principles governing business processes, financial and investment decisions are considered, social, ethical and environment friendly, and hence more sustainable. Investing into socially responsible impact funds, also known as ESG investing, is fast becoming the preferred option for a growing number of investors worldwide. The Covid-19 pandemic reinforced the importance of long-term sustainable approach centred around ESG principles and their impact on investment returns.
Growing Interest In ESG Investing
The amount of professionally managed portfolios that have integrated key elements of ESG assessments have been growing rapidly – it currently exceeds $17.5 trillion globally. Also, the growth of ESG-related traded investment products available to institutional and retail investors currently exceeds $1 trillion and continues to grow quickly across major financial markets.
Europe (EU) has led the way in adoption of ESG followed – since 2014, more than 2,000 ESG-dedicated funds have been launched in Europe alone and investments in sustainable products in Europe are expected to reach over 7.6 trillion euros by 2025.
ESG now has become the key criteria governing the investment decision making process in other places outside Europe, like Canada, America, Australia and New Zealand and also some countries in Asia like Japan.
Pandemic Reinforced ESG Investing
ESG considerations are steering business and investment decisions like never before. Around 79 per cent of investors in Asia-Pacific increased ESG investments “significantly” or “moderately” in response to Covid-19, according to a recent MSCI 2021 Global Institutional Investor survey. That is a slightly larger share than the 77 per cent of investors globally who increased sustainable investments during the period. Overall, the figure rose to 90 per cent for the largest institutions, or those with over $200 billion of assets.
There are also clear evidences that stocks of companies with strong performance on ESG issues were less volatile during the market turbulence triggered by the pandemic and offered better returns. Impact investing securities, as measured by the S&P 500 ESG Index, outperformed the broader market with a total return of 20.4 per cent over the past 12 months compared to the S&P 500's total return of 19.7 per cent, as of February 9, 2021. These factors reinforced ESG investments worldwide.
Limited Options For Indian Investors
In the Indian context, ESG investing is still in its nascent stage and currently only a handful of fund houses have launched their dedicated ESG funds.
There is however a strong and growing interest for investing in sustainable funds among Indian investors, which gained further traction during the pandemic. Investment in ESG schemes increased from Rs 21,00 crore in last fiscal to Rs 3800 crore as of end of January 2021.
Yet, the adoption of ESG investing is still rather slow in comparison to US and Europe where ESG funds account for 50 per cent of total AUM.
Global Investing Need Of The Hour
In the aftermath of the Covid-19 crisis, Indian investors, like their global counterparts, will need to increasingly consider ESG factors while making their investment decision.
ESG themed ETFs listed on global markets like the US will allow investors to achieve diversification while owning the world’s leading companies that follow specific ESG criteria. By investing globally, portfolios will generally have the dual benefit of better markets and appreciating currencies. Global diversification will also help stabilize the overall portfolio of Indian investors as limiting to only domestic markets raises the portfolio’s concentration risk of investing in just one economy.
The author is Chief Operating Officer, MNCL
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