3 ESG trends that are set to shape the future of the investment market

ESG is a runaway train, and investors are aware that if they don’t jump on board now, they risk being left behind. Standing for environmental, social and corporate governance, ESG refers to socially responsible investing. Bloomberg data predicts that ESG assets will amount to $53 trillion by 2025, and the financial data company put this into perspective when they equated this to more than a third of projected total assets under management (AUM) in the same time frame.

Why exactly have non-financial factors caught the attention of investors?

There are many reasons, including green recovery in the post-pandemic world, a greater focus on climate risks, and a more acute awareness of social responsibilities. With these in mind, we have evaluated three major ESG trends that are set to shape the future of the investment market.

A boost to green finance

2020 and 2021 have both been watershed years for ESG, with the pandemic fuelling the transition from premiums to ‘greeniums’ and the graph above depicts the uprise of the number of searches in Google for 'ESG'. On top of this, a Morgan Stanley survey found that 95% of millennials – anyone born between 1981 and 1996 – have a vested interest in sustainable investing. As more millennials continue to take on these investor roles, the investment market is seeing the shift towards ESG investing ramp up.

Sustainable investing is just one piece of the ESG pie, but with climate news dominating the headlines, it’s become an increasingly important piece. Add to this the fact that companies with strong ESG propositions were better positioned to weather the storm that the pandemic kicked up, and it’s no surprise that companies are increasingly noticing the importance of green finance.

A great deal of progress has been made in the wake of the pandemic, and this is the very reason why businesses are shunning the idea of returning ‘back to normal’. It would signify moving backwards and undermining the progress made in the green finance sphere. Instead, companies need to make sure that green recovery plans don’t lose momentum.

Private equity firms are putting ESG under the lens

Having monitored the market for the last seven years, PwC found that most private equity (PE) firms have turned up the heat on ESG investments.

Where ESG was once a nice-to-have, ESG specialists have identified that these practices have the potential to turn a significant profit and outperform traditional investing.

McKinsey aggregated data from over 2,000 studies, looking into the impact of ESG propositions on equity returns, and 63% showed positive findings, while only 8% of studies presented negative results. These results reaffirm the notion that PE firms need to scrutinise the legitimacy of green bonds and ensure that ESG gets the airtime it needs in boardroom discussions.

A greater need for ESG data

Like any other industry, the investment market operates in a data-driven world. With data likened to a gold mine, analysis of it at asset-level will mean ESG analysts can gain insight into environmental and sustainability-related risks.

ESG data will give investors a much clearer picture of the socio-economic impact of a company or project, and therefore help them to make more informed decisions. Historically, this data has been outdated from the moment that it’s been used. However, the data revolution has enabled access to real-time data using satellites that can measure impact by looking at factors such as deforestation.

As a result of regulatory drivers such as COP26, corporations can expect to see the quality and quantity of ESG data continue to improve. To tap into this data and accurately assess a company's ESG performance, ESG managers and heads of ESG will need to work closely with ESG analysts.

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