Socially responsible investing is far more than just a bubble, it’s now breaking all records. What investing based on ESG (environmental, social, and governance) factors exactly constitutes can be tricky to define but funds insiders say the appetite for funds with genuine sustainable credo shows no signs of slowing down.
Demand for sustainable investments overtook traditional products in 2020, and global sustainable fund assets more than doubled in 2021. With Bloomberg Intelligence suggesting assets could reach $50 trillion by 2025, observers say that within a matter of years, 100 per cent of investments will consider ESG risks and opportunities.
According to Tara O'Reilly, co-head of Arthur Cox's Asset Management and Investment Funds Group, sustainable investing aims to look beyond traditional financial metrics and invest with other issues, including environmental, social and governance, in mind. ESG funds are no longer considered "niche", she says.
“Many of these issues would already be considered in the general evaluation of an investment and its risks, but sustainable investment is choosing to invest in a way that supports your preference on these issues. Investors are driving much of the demand and businesses are responding. Most funds in our pipeline for launch in the next 12 months are expected to have some element of ESG consideration.”
“The growth of responsible investing in the last few years has been extraordinary, with assets in European funds marketed as sustainable hitting €4 trillion, accounting for almost 40 per cent of all assets managed in European Union-domiciled funds. In Ireland, we have seen a noticeable increase in the clients that have either implemented or are considering implementing ESG solutions,” says Tom O’Gorman, head of distribution, Ireland at Legal & General Investment Management (LGIM).
It’s promising that ESG is getting the overdue exposure that it deserves, he says. “We welcome the focus that Irish investors now have around sustainable investing – whether this is within an equity, fixed income or multi-asset solution, Irish investors are now considering the risk, return and ESG criteria of the solution.”
'In 2021, investment in ESG funds approached $700 billion, more than double the 2019 figure, and now makes up 10 per cent of worldwide fund assets'
"While this area has been gathering momentum for some years there is a sense that it is really picking up pace of late. In 2021, investment in ESG funds approached $700 billion, more than double the 2019 figure, and now makes up 10 per cent of worldwide fund assets," Brian Haugh, head of BDO Valuation and financial modelling centre, adds.
Haugh says he is slow to ascribe too much of this acceleration to the pandemic, but he admits that the early data does seem to suggest that ESG investments have been more resilient over the pandemic than ESG-neutral ones, “which will give investors confidence in the area”. Rather, he believes that a growing realisation of the realities of climate disaster has pushed the needle more firmly in this direction.
‘Climate catastrophe’
“I believe that Cop26, the publication of the IPCC reports, and the subsequent media coverage of these, was probably a bigger factor. I think that there was an urgency about the coverage that was missing when previously reporting on climate issues, and this seems to have focused the mind of policy makers, investors and the general public on taking big and decisive actions now to avoid climate catastrophe,” he says.
Haugh cites the Glasgow Finance Alliance for Net Zero pledge of $100 trillion to finance climate action projects, and says this "will have focused the mind of a lot of fund managers".
“This pledge by 450 banks, insurance funds, money managers, and other investors, combined with the greater clarity around definition of green investment provided by the EU taxonomy, has the potential to channel investment into green finance on an unprecedented scale,” he explains.
'There will be a $100 trillion green finance market up for grabs over the next decade'
“There will be a $100 trillion green finance market up for grabs over the next decade, and fund managers who can credibly demonstrate how they can help deliver on this net-zero ambition can expect to be extremely busy.
O’Gorman echoes this, saying Glasgow also saw the launch of the Net Zero Whole Life Carbon Roadmap. This is an industry-led initiative that serves to quantify, for the first time, the specific emission reductions across sub-sectors of the built environment that will need to take place every year so the 2050 target of net zero carbon emissions can be achieved.
O’Reilly agrees that the EU’s ambitious targets in relation to carbon neutrality and its regulations are significantly driving transparency in relation to green investing.
“The cost of this has to be supported by the financial markets, and so the EU is seeking to reorient capital flows into more sustainable investments and as we see this regulation come into effect, we are seeking the greater development of new green products,” she explains. “Ultimately, investors will decide on what they believe meets their needs and expectations in terms of green investing.”
It is clear that green investing shows no sign of slowing its momentum, but the “S” in ESG ( social) is often pigeon-holed and misunderstood, O’Gorman notes. “The ‘E’ and the ‘S’ are intrinsically linked. We must ensure the global transition to a lower-carbon economy is both fair and inclusive; social and environmental objectives should go hand in hand,” he says.
Compromising returns?
Many still view social investing as a “niche asset class” due to the misplaced perception that social impact comes at the expense of financial returns. However, delivering social impact does not always compromise risk-adjusted returns, O’Gorman argues.
'There is compelling argument and evidence that real-estate owners should be considering social impact as a crucial aspect of all investment activity'
“This can be seen particularly in the real assets realm, where there is compelling argument and evidence that real-estate owners should be considering social impact as a crucial aspect of all investment activity, in the same way the environment has become integrated into the process. For example, in most instances, there is a natural alignment between the commercial interests of longer-term real assets owners and contributing to improving economic, societal and environmental outcomes for the local community.”
O’Gorman offers the example of LGIM Real Assets’ partnership with Clúid Housing – providing €54 million long-term financing to Clúid, one of Ireland’s largest approved housing bodies. The funding will enable the delivery of around 200 new social homes across Ireland, marking the first Irish approved housing body to secure a financing agreement of this scale with an international institutional asset manager.
This drives “holistic value”, he says. “Through delivering much-needed long-term pension fund capital to the housing sector, we not only meet the needs of our clients, but bring real economic growth and social value.”