Life is being on the wire, everything else is just waiting. — Karl Wallenda
Crises often trigger irrational behaviors from investors shifting their focus towards short-term goals that don’t always coincide with their long-term plans. The economic uncertainties reinforce risk aversion setting off the flight-to-safety phenomenon. This pandemic is no exception. The volatility in the global financial market left investors scrambling for higher quality and less risky assets. Irrational as these behaviors may be, crises reshape the future of investment. This holds true for ESG investing. The primary driver of doing ESG is risk mitigation and COVID-19 pushed environmental and societal issues higher up the risk spectrum. Parallels have been drawn between risks of a pandemic and issues such as biodiversity and climate change. The pandemic crisis expands the conversations around ESG and reinforces its importance.
ESG Investing involves incorporating ESG metrics into the investment analysis and including ESG factors as investment considerations. Environmental go beyond climate change and encompasses the holistic approach of conservation, including biodiversity, resource efficiency, and waste management. Social refers to people and relationship consideration while governance metrics set standards for running a company. ESG Investing is not an entirely new concept and has been around for at least twenty years. The last decade saw this once slow-moving train pick up more pace. ESG evolution is dynamic, and the significant advancements in the later years extended across asset classes.
Figure 2. Sustainable and Responsible Investing in the United States (1995-2018)
ESG trends show COVID-19 not only increased awareness but more importantly, boosted demand for ESG products. A survey conducted by the Investment Management Association of Singapore (IMAS) in June showed almost 70% of the respondents believed the pandemic will accelerate the adoption of ESG investments as ESG market becomes more relevant during the COVID-19 period. The pandemic also gave sustainable investments an opportunity to demonstrate their capacity to create value. ESG investments fared better than their counterparts during the abrupt market drop brought about by the pandemic. Most MSCI ESG Leaders indices globally have outperformed the mainstream market. A study by investment manager Fidelity International on more than 2,600 companies revealed positive correlations between ESG ratings and market performances. 44% of KPMG survey respondents cite the opportunity to generate alpha from ESG strategies as their overriding factor. Global investment management firm, Allianz Global Investors saw a vast majority of its sustainable strategies outperforming broad market benchmarks in the first quarter of this year.
Investors should start getting their head into the ESG game. The IMAS 2020 Annual Survey ranked ESG as the leading future driver of investment growth in the next three years. ESG has gone from nice-to-have to a must-have, says Anthony Cowell, KPMG’s head of asset management in the Cayman Islands. 74% of global investors plan to increase ESG ETF allocation according to the 2020 Global ETF Investor Survey conducted by a U.S. private bank, Brown Brothers Harriman (BBH). On the hedge fund front, a survey conducted by KPMG showed that 84% of hedge fund managers reported increased interest in ESG over the last 12 months.
The largest ESG ETF is JPMorgan BetaBuilders ETF (BBEU) with $5.24 billion assets under management. Some of the top-performing ESG ETFs in the last trailing year are iShares MSCI Denmark ETF (EDEN), iShares MSCI Europe Financials ETF (EUFN), First Trust Global Wind Energy ETF (FAN), iShares MSCI Sweden ETF (EWD), and iShares MSCI Global Impact ETF (SDG).
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