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By Sonia du Plessis, CFP®*
Environmental, social and governance (ESG) investing represents one of the hottest investment themes this year, with many predicting that the likes of ESG, impact investing, and socially responsible investing are all about to take flight in the next few years.
Millennials and Generation Z are driving a profound change in the ways we invest, demanding that values pertaining to sustainability are seriously considered when making an investment or constructing a portfolio.
According to offshore capital markets consultancy Opimas, the overall value of assets under management (AUM) at funds leveraging ESG data has increased significantly over the past four years, from $22.9trn in 2016 to more than $40 trillion in 2020. “With ESG data integration becoming prevalent at asset managers, this growth trajectory is unlikely to slow any time soon,” Opimas noted, strongly suggesting that sustainable investing will continue to experience considerable growth in 2021 and beyond.
Furthermore, demand from investors to decarbonise their portfolios coupled with a shrinking pool of investments that align with the goals of the Paris Agreement may leave investors in the year ahead with little choice but to call on companies to exit some businesses altogether, according to MSCI’s 2021environmental, social and governance (ESG) trends to watch report.
The Paris Agreement is a multi-nation pact developed by parties to the United Nations Framework Convention on Climate Change (UNFCCC) to combat climate change. The agreement’s main goal is to limit the global temperature increase in this century to below 2 degrees Celsius above pre-industrial levels and to work toward limiting the increase to 1.5 degrees.
Investors in 2021 can also expect a more nuanced understanding of when and how ESG delivers financial benefits, alarm bells on biodiversity, a deluge of ESG disclosure, and a focus on addressing social inequality.
“Climate. ESG bubbles. Disclosure. Social inequality. Biodiversity. The topics don’t get much bigger or more systemic,” the report reveals.
Some corners of the investment world call ESG investing the most significant development in money management since the creation of the exchange-traded fund two decades ago and it will reshape finance just as passive funds have.
The Nasdaq exchange, one of the biggest in the USA market, listed ESG investing as one of the most significant future investment trends and also noted that major asset manager BlackRock indicated late in 2020 that it will account for ESG factors in 100% of its investments.
Are you more passionate about protecting the environment or promoting workplace diversity? Do you want to make a difference in your community or at the national level?
Brenthurst Wealth has recently started to include the Baillie Gifford Positive Change fund, in offshore investment portfolios. This fund has exposure to Tesla and Moderna and has a strong underlying ESG theme. The fund aims to make a change in one of four areas, namely: 1) Social Inclusion and Education, 2) Environment and Resources needs, 3) Healthcare and Quality of Life and 4) addressing needs of world’s poorest populations. It is however a high risk fund and will not fit into everyone’s risk profile. The fund has performed very well, with reported returns of over 80% in Dollar terms for the last 12 months.
Regulators across the world are making green issues a top policy priority and are creating a rulebook to ensure financial firms incorporate sustainability into their operations and root out so-called greenwashing. At the same time, growing public awareness of ESG-related risks — which has been accelerated by Covid-19 — and the emergence of a generation of investors who prioritize non-financial impacts alongside financial factors, has fueled the growth, according to a recent PwC report.
The consulting firm’s report, which was published by its Luxembourg unit, also featured a survey of 200 asset managers, 300 institutional investors and more than 800 retail investors.
The performance of ESG funds relative to their traditional peers in recent months also has caught investors’ attention, as reported in the Financial Times. Fund managers from BlackRock Inc. to Allianz Global Investors and Invesco have said ESG portfolios outperformed during the Covid-19 sell-off.
Brenthurst Wealth has a proud and long standing relationship with Ninety One. Ninety One has made a commitment to follow certain Principles for Responsible Investment (PRI). They have outlined six specific PRI commitments and will apply these principles, when buying into any company used in one of their funds.
Boutique Collective Investments (BCI), which BWM further uses for its funds of funds, uses ESG metrics as the basis to interrogate ESG profiles of various platforms, products and propositions.
But investors should be aware that not all socially responsible investments have the same impact. One unit trust may screen only for environmental factors but does so across entire industries. Another fund may support shareholder resolutions in the shares within their portfolio, which push ESG compliance and reporting.
Consult a financial advisor, if you want to invest in a fund following ESG principles, who will guide you to the investments which will deliver the type of change you are hoping to see or believe in and achieve sound returns.
- Sonia du Plessis is Head of Brenthurst Wealth Stellenbosch. firstname.lastname@example.org.