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How has Covid-19 affected ESG investing? Signs suggest it could become mainstream

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In 2020, Covid-19 dominated the headlines. There were concerns that it would mean some of the challenges and opportunities ESG investing represents would fall to the wayside. However, in many cases, the pandemic has actually moved ESG investing up the agenda.

“ESG investing” refers to making investment decisions that consider environmental, social or governance practices. That may mean avoiding firms that contribute to climate change, or investing in companies with a positive track record for human rights. ESG covers a wide range of issues in how businesses conduct themselves and the impact they have. There is also a variety of ways ESG can be incorporated into investment portfolios.

ESG investing has slowly become more popular over the last decade, with the pandemic potentially providing a boost to make it mainstream. While environmental issues have often been at the forefront of ESG criteria, Covid-19 has highlighted the importance of social and governance issues.

At present, ESG investment funds represent a small portion of investments. Around $1 trillion is invested through ESG-dedicated funds, about 2% of the market, according to JP Morgan. However, in a survey that questioned global institutions, representing $12.9 trillion in assets under management, 71% believe that Covid-19 will increase awareness of ESG investing. Some 55% believe the pandemic will be a positive catalyst for ESG, compared to 27% that believe it will have a negative impact. It seems that Covid-19 could lead to far more money flowing into ESG funds.

3 signs that ESG investing could increase after the pandemic

1. Principles for Responsible Investment (PRI) reports higher levels of engagement

PRI encourages investors to consider ESG factors and manage risks. Despite fears that a focus on Covid-19 would affect engagement with ESG issues, a PRI survey suggests the opposite is true.

Some 64% of respondents said that Covid-19 has brought social issues that were not already a priority onto their radar. This includes areas like occupational health and safety, social safety nets and supply chain issues. Among the key areas that are expected to be prioritised in the future are mental health, human rights, and access to healthcare.

While social issues have moved up the agenda, it hasn’t come at the expense of environmental factors. Almost eight in ten (79%) said they see the Covid-19 recovery phase as an opportunity for governments to step up ambitions towards reducing emissions. More than half (57%) also said they believe the pandemic has accelerated structural changes in the energy sector to present opportunities for renewables.

2. Figures from the Investment Association show ESG assets continue to rise

While ESG investing still accounts for a relatively small portion of the market, it is growing.

According to the Investment Association, UK investors placed £7.1 billion into responsible investment funds in the first three quarters of 2020. When compared to 2019, that’s an extra £1.9 billion. The figures suggest that ESG is slowly gaining traction among investors.

It’s a similar picture in other parts of the world too. According to Morningstar, $20.9 billion was invested in sustainable funds in the first half of 2020 in the US. This is only slightly short of the 2019 annual amount of $21.4 billion in just half the time. The current 2019 record was also four times the previous record, indicating that demand for ESG investing is picking up.

3. BlackRock research shows ESG investing can have a positive financial impact

One misconception about ESG is that it results in lower financial returns. While ESG investments are still exposed to risk, which should reflect your risk profile, this isn’t automatically the case.

In fact, in 2020, when investment markets experienced volatility, ESG funds often outperformed their benchmarks according to research from BlackRock. Some 94% of globally representative sustainable indices outperformed benchmarks in the first quarter of 2020. While this only covers a short time, it does indicate that considering ESG risk factors when investing can improve resilience.

In the report, BlackRock says: “Our view: Companies with strong profiles on material sustainability issues have the potential to outperform those with poor profiles. In particular, we believe companies managed with a focus on sustainability should be better positioned versus their less sustainable peers to weather adverse conditions while still benefitting from positive market environments.”

Please get in touch if you’d like to learn more about ESG investing and how it could be incorporated into your portfolio. We’ll help you create a long-term plan that includes ESG as well as considering other factors, like your investment goals and risk profile.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

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