The State of Sustainable Investing: Why It Has Staying Power

What does this disconnect and the controversy erupting around ESG mean for the broader investor community? How can we expect the landscape to evolve?

Incorporating environmental, social, and governance factors into a long-term investment outlook for a company is not a novel or radical idea; active managers have always sought to build a better mousetrap than the rest of the market. Climate change, demographic changes, and the advent of the omnipresent, internet-enabled free flow of information mean the risks and opportunities facing corporations today differ widely from those of the 20th century. Our expectations of corporations—both as consumers and investors—have shifted too.

The issue areas that sustainable investing addresses can be summarized by the three fundamental areas of ESG. Environmental considerations reviewed during the investment decision-making process include issues such as a company’s approach to climate change and biodiversity. Social factors can include company policies and practices around working conditions, human rights across supply chains, and the impact on local communities. And governance issues can include executive pay, data privacy, and board diversity. 

As demographics, geopolitical dynamics, and the Earth’s climate continue to rapidly change, investors increasingly view these issues as long-term systemic risks. Bloomberg Intelligence reports that ESG assets are expected to rise 43% (from year-end 2020) to $50 trillion by 2025—a third of all global assets under management.¹ North America has long trailed Europe in ESG adoption but is catching up quickly: Morningstar finds that 7 in 10 U.S. adults are at least somewhat interested in investments that consider carbon emissions, labor practices, or regulatory and compliance history.² The increasing focus on sustainability in Emerging Markets countries like China, which is fueling innovation in EVs, has opened a new frontier in sustainable investing.

The advantages of incorporating ESG criteria into risk management are clear; an ESG-integrated investment approach can identify and circumvent reputational risks before they become corporate scandals (and meaningful financial losses).

Sustainable investing can also help investors identify long-term, top-performing companies. NYU Stern’s ROSI (Return on Sustainability Investment) methodology finds that paying closer attention to sustainability drivers like risk management, shareholder engagement, talent management, and innovation enables companies to drive revenue growth, greater profitability, and higher corporate valuation. 

A significant factor behind the growth of sustainable investing is that it allows investors to build investment portfolios that align with their values while avoiding companies and industries that do not. This is accomplished through tools like positive and negative screening that weed out companies to perform poorly on ESG risk criteria or actively tilt toward industries with high sustainability scores. Investors can also focus on specific themes like water, clean energy, or gender diversity. 

So, where does sustainable investing go from here? The story is unwritten, but one thing is certain: The drivers behind it are not slowing. According to Bloomberg NEF and J.P. Morgan Asset Management, global investment in renewables increased tenfold between 2004 and 2020—from $33 billion to $304 billion.³ With over 80 countries committed to ambitious emissions reduction targets by 2050, that pace will likely accelerate.

Likewise, increasing focus on diversity, equity, and inclusion on earnings calls suggests businesses are aware of regulatory pressure and stakeholder interest. And as investors begin to focus on corporate policies around data and privacy,⁴ governance issues will become even more prominent, especially in areas like technology.