Despite short-term market challenges that have put temporary pressure on ESG portfolios, ESG investing is here for the long haul
ESG investing — an approach that evaluates the Environmental, Social and Governance considerations that influence each company’s business decisions — has taken a bit of a hit recently. To be fair, the entire market has taken a hit this year, thanks to record inflation paired with near-record-low unemployment rates, continuing supply-chain issues and a war in Europe, which are roiling the world’s largest economies and creating tremendous volatility in the stock market.
In times of turbulence, some investors prefer to stick with more traditional investments, and although ESG has been around since the 1960s, it has really only become more widespread in recent years. But even though there are challenges confronting this investing category, there are also many reasons it’s here to stay.
From frameworks to fiduciary duty
Since 2005, a global ESG framework has been in place — endorsed by 23 financial institutions, along with the International Finance Corporation and World Bank. And today, ESG investing is estimated to represent more than a third of all assets under management.
Consumer demand has been increasing, with growing demand for ESG investment products now outstripping supply. A new study by PwC found that 81% of U.S. institutional investors plan to increase their allocations to ESG products in the next two years.
The growing demand may have something to do with fiduciary duty, which holds that asset managers must operate in the best interests of their clients. Fiduciaries are obligated to consider all material information at their disposal, including (and especially) information that affects the financial performance of their holdings. As ESG issues exert more influence on financial markets (consider the impact of COVID and climate change on the economy, for example), fiduciaries must consider them as they evaluate the most sound investment practices for this day and age. Environmental, social and governance issues aren’t likely to go away anytime soon.
Short-term challenges, long-term future
Still, in a volatile market, investors’ priorities can change, says Mary Lou Miles, Head of Wealth Management at Genus. “It was like this in 2008,” she says. “No one wanted to talk about any kind of sustainable investing or ESG.”
With energy prices soaring worldwide —and supply, throughout much of Europe, severely strained — fossil-fuel energy stocks are the ones benefiting most in 2022.
But this is a short-term challenge for ESG investors. And the reality is that investors have to pay attention to what’s happening in the environment, in our society and in how our companies are being governed – not just today or next month, but in the years and decades ahead.
“It’s all interconnected,” says Miles. “We are a much more global economy now. And climate change is real. From heat waves to fires, floods and atmospheric rivers — this affects not only where people live but where they work.” By one recent estimate, floods, droughts and major storms could cost Canada’s economy $139 billion over the next 30 years.
ESG is now embedded in just about every business practice, says Miles, with financial regulators requiring companies to report ESG metrics on a variety of corporate filings: “Like price-earnings ratios or cash flow analysis, ESG is becoming part of how we measure companies.”
Getting started with ESG investing
Knowing what your investment firm’s filters are — as they relate to E, S and G — is critical, says Miles. So, too, is deciphering exactly what qualifies as an ESG investment. Some asset managers have been less than scrupulous about how they incorporate ESG into their investment processes – and communicate those decisions to investors. Miles is all too familiar with this reputational challenge of “greenwashing.”
“Some investors feel that all this is smoke and mirrors— that ‘people aren’t actually doing it; it’s just the flavour of the month,’” says Miles. “And what we want to say is: There is a real differentiator here: Are you buying in and making this a part of your investment approach? Or, are you just doing this for marketing purposes?”
Genus’ longstanding commitment to thorough vetting of ESG investments has eliminated many of these barriers to entry for ESG investors.
Whether investors are doing it to save the world — or because it is soon to become the “way of the world” — one thing is clear: ESG investing is here to stay.
Interested in exploring what ESG investing could look like for you? Contact a Genus advisor today.
1 “The Evolution of ESG Investing.” MSCI, https://www.msci.com/esg-101-what-is-esg/evolution-of-esg-investing
2 Documents & reports – The World Bank. (n.d.). Retrieved October 25, 2022, from https://documents1.worldbank.org/curated/en/280911488968799581/pdf/113237-WP-WhoCaresWins-2004.pdf
3 Posner, M. (2022, August 18). On ESG investing, the Economist offers the right diagnosis but a faulty prescription. Forbes. Retrieved October 24, 2022, from https://www.forbes.com/sites/michaelposner/2022/08/17/on-esg-investing-the-economist-offers-the-right-diagnosis-but-a-faulty-prescription/?sh=76b351994ccf
4 Boyde, E. (2022, October 11). Demand for ESG investments outstrips supply, PWC finds. Financial Times. Retrieved October 24, 2022, from https://www.ft.com/content/5763c866-3437-4b66-8467-09486454a162
5 PricewaterhouseCoopers. (n.d.). Asset and Wealth Management Revolution 2022: Exponential expectations for ESG. PwC. Retrieved October 24, 2022, from https://www.pwc.com/awm-revolution-2022
6 CBC/Radio Canada. (2022, August 29). Water risk could cost Canadian economy $139B in next 30 years, report says | CBC News. CBCnews. Retrieved October 24, 2022, from https://www.cbc.ca/news/business/water-risk-canadian-economy-impact-1.6565523
7 Marketing, G. (2021, December 3). The truth about your impact mix. Genus. Retrieved October 24, 2022, from https://genuscap.com/truth-about-impact-mix/
8 Flood, C. (2022, June 20). Asset managers told to clean up greenwashing and net zero claims. Financial Times. Retrieved October 24, 2022, from https://www.ft.com/content/f1367ab4-ac6f-486d-8bd2-e7659448055d