Are Environmental, Social and Corporate Governance assets the future of investing?

The coronavirus pandemic has acted as a catalyst for an increase in the number of portfolios adopting sustainable investments that fall under the category of ESG.

ESG investments used to form only a small part of traditional financial metrics when picking stocks and were previously a very niche area of finance. According to PwC, ESG funds will experience a threefold increase in assets by 2025, which will increase their share of the EU fund sector from 15% to 57%!

The everyday consumer is becoming increasingly conscious of the environment around them and the impacts that companies have on that environment. Therefore, with the coronavirus pandemic highlighting the need for change, this is a perfect time for the investment/ asset management industry to change their investment portfolios in a way that will benefit society as well as investors.

UBS Asset Management has adopted ESG investing through its ‘Climate Aware’ framework that aims to invest in securities such as climate aware equity and climate aware corporate bonds. These investments will support companies that are focused on exercising corporate social responsibility and are actively trying to tackle society's problems. Goldman Sachs Asset Management has also adopted ESG into their investment portfolios as they released a ‘supercharged’ healthcare equity fund.

So, what are the benefits of these investments to asset managers and to the investors’ capital they are using? A report published by Oxford University found that managers who incorporated ESG investments in their portfolios achieved better returns than on traditional investments. This can be seen graphically in the figure below.

ESG investments are also perceived as less risky. Companies that engage in ESG activities are less vulnerable to reputation, political and regulatory risk and this is what lowers their volatility of cash flows and the companies overall profitability. This is reflected in the markets where securities associated with these companies are bullish.

With ever-increasing consumer demands for companies to be more environmentally and socially responsible, and an increasing number of boycotts by consumers who don’t meet these requests, can asset managers and investors profit from this by moving funds into ESG investments? By the looks of it, we think yes!