Socially responsible investments that track environmental, social, and governance principles have gathered momentum in 2020, and four trends may continue to support this trade.
“While the pandemic was the catalyst for increased flows into ESG investments in 2020, we expect global action on environmental and social challenges to spark flows in 2021,” State Street Global Advisors’ Brie Williams, Head of Practice Management, and Rebecca Chesworth, Equity ETF Strategist, said in a recent research note.
“As the foundation for ESG investing expands, momentum will continue to build across the globe. We look forward to seeing how investors will respond to businesses and governments that hold themselves accountable to multiple sets of stakeholders, including shareholders, employees, customers, suppliers, affected communities, and local and global environments.”
Specifically, the strategists highlighted four major trends that could continue to drive the forward momentum in ESG investments. For starters, they highlighted an emphasis on ESG to pursue better risk-adjusted returns. Compared to the S&P 500 Index, the S&P 500 ESG and S&P ESG Exclusions II indices showed about a 1.5% outperformance, with less volatility of returns.
“ESG strategies (whether exclusionary, best-in-class/positive screening and/or benchmark aware) could continue to benefit as they could remove potential threats to performance and help investors pursue lower downside risk,” they said.
Secondly, the pandemic highlighted ESG’s lower-profile S pillar. The challenges that COVID-19 inflicted on workforces and underprivileged parts of the population made corporate social responsibilities more relevant, with those that were better prepared for upheaval ready to prosper in the post-pandemic world.
Thirdly, there is increasing ESG integration into investment policy statements. Global regulators and policymakers have increasingly outlined strict guidelines to ensure that asset managers who incorporate ESG considerations into their investment strategies can provide end investors with a transparent understanding of their methodology.
“Looking ahead, we believe that companies that engage in stakeholder capitalism (considering the impact on clients, employees, society) are likely to be better positioned for long-term value creation. This remains a core argument for value-based ESG integration,” they added.
Lastly, the strategists highlighted the greater recognition of the climate emergency. The United Nations-backed Principles for Responsible Investment lists climate change as the biggest risk that investors now face, citing physical and transition risks to portfolios.
For more news, information, and strategy, visit the ESG Channel.