Adoption of ESG investing and asset growth has accelerated. You can help clients pursue their goals by effectively integrating ESG principles into portfolios.
Environmental social and governance (ESG) investing tends to land in the spotlight during extreme events like the global pandemic. However, the trend line is unmistakable: ESG investing has been growing for a while. Between 2017 and 2019, ESG investing grew by more than a third, to $30+ trillion, over a quarter of the world’s professionally managed assets.1 Some estimates say it could reach $50 trillion over the next two decades.2
But exactly what is ESG investing? Some think it is all about investing for impact. Others think it is about imposing a certain set of values on companies.
ESG is about informing better decision-making by adding the assessment of material, environmental, social and governance issues to the investment process. It enriches traditional research like analyzing financial statements, industry trends and company growth strategies.
What began as a vehicle for expressing one’s values has evolved into a means of adding value to a portfolio. As State Street Global Advisors President and CEO Cyrus Taraporevala observes, “Addressing material ESG issues is good business practice and essential to a company’s long-term financial performance—a matter of value, not values.”
1 State Street Global Advisors. “Into the Mainstream: ESG at the Tipping Point.” November 2019.
2 www.cnbc.com. “Your complete guide to investing with a conscience, a $30 trillion market just getting started.” December 14, 2019.
3 Gunnar Friede, Timo Busch & Alexander Bassen, “ESG and financial performance: aggregated evidence from more than 2000 empirical studies”, Journal of Sustainable Finance & Investment, Volume 5, Issue 4, p. 210-233, 2015. Benice Napach, “ESG-Focused Funds Are Outperforming During Pandemic, Think Advisor, May 21, 2020. Morningstar, “How Did ESG Indexes Fare During the First Quarter Sell-off?” April 8, 2020.
4 State Street Global Advisors. “Performing for the Future.” 2017 Survey.
Originally Posted on August 12, 2020 – How to Work with Clients to Integrate ESG Investing
The returns on a portfolio of securities which exclude companies that do not meet the portfolio’s specified ESG criteria may trail the returns on a portfolio of securities which include such companies. A portfolio’s ESG criteria may result in the portfolio investing in industry sectors or securities which underperform the market as a whole.
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