The amount of money invested in sustainable investing, environmental challenges, and climate change has increased significantly. Between 2019 and 2020, the annual capital flow into sustainable funds more than quadrupled, and it has multiplied tenfold since 2018. What led to this quick expansion of sustainable investment, and what can be predicted for its future expansion?
The increasing popularity of sustainable finance
It’s no secret that over time, interest in sustainable investment has grown. Total assets invested in sustainable investments have multiplied 25-fold since 1995. With positive quarterly capital inflows into sustainable funds in 31 of the previous 32 quarters, this increase has been remarkably stable over time. Since the third quarter of 2015, more money has gone into sustainable investment possibilities than it has left.
According to the United States Forum for Sustainable and Responsible Investment’s 2020 Trends Report, the total value of sustainable investment assets under management has increased by 42% from 2018 to $17.1 trillion. As the number of property funds, REITS, hedge fund assets, and overall investment vehicles have all expanded over the last five years, alternative investment vehicles for sustainable investing have grown across the board. According to current estimates, 33% of all U.S. assets under professional management are associated with ESG principles or sustainable investment. Let’s look at a few of the factors that have contributed to the popularity of ESG investing.
Investment achievement
Assets in ESG have outperformed their comparable investments, which is one of the key drivers of growth in sustainable investing. ESG firms’ stock performance has lower volatility than that of their peers by 28.67% while also increasing equity return by 6.12%. This was true for each of the 12 sectors examined, including the ones for materials, energy, food, and beverage, and transportation.
Farmland is one example of an illiquid real asset that has produced larger returns than conventional investments with substantially lower volatility. Farmland investments have outperformed bonds over the previous 25 years in terms of risk-adjusted return. The effectiveness of real assets as an inflation hedge has also been shown. ICMA noted that due to an increase in the average household’s expenditure on food, a rise in agricultural prices often fuels inflationary economic trends. As a result, investments in farms have often generated returns that are higher than the CPI average. Investments in farmland have a higher correlation with inflation than investments in equities, gold, or government bonds.
Interest among investors is increasing
Demand from institutional and ordinary investors seeking to invest in ESG assets has been rising. 80% of asset owners are adopting sustainable investment more and more, while another 15% are actively contemplating doing so. Millennials may have formerly dominated sustainable investment, but new data reveals that the statistical gap between age groups’ preferences for ESG investing has shrunk. In a Morningstar survey, 72% of all American adults reported having at least some interest in sustainable investment. Entirely 11% of individuals would prefer to concentrate only on bigger returns, whereas 21% of those polled indicated a strong interest in ESG investment.
The mindset of retail investors toward sustainable investments has been evolving. In their portfolio decisions, 74% of financial advisers said their customers were dedicated to social and environmental reasons. Only 30% of financial advisers responded to this same study conducted two years earlier with the same conclusion. Institutional investors are just as eager in participating in sustainable investment possibilities, if not more so. In the fourth quarter of 2020 alone, institutional equity of over $3.4 billion was invested in sustainable open-end funds or ETFs.
Governmental action and legislation
Lawmaking will only promote the growth of sustainable investment. To enable fiduciaries to take ESG considerations into account when suggesting investment strategies, Senate Democrats submitted an amendment to the Employee Retirement Income Security Act. To force big asset investment advisers to identify the ESG aspects taken into account when making investment choices, House Democrats presented the Sustainable Investment Policies Act. The Retirees Sustainable Investment Opportunities Act gives ERISA-governed plans the authority to specify how their investments will address sustainable investing issues, such as the effects of climate change.
Additionally, this pattern is highly known around the world. Six nations—Denmark, France, Hungary, New Zealand, Sweden, and the United Kingdom—have made carbon neutral objectives part of their national legislation; another 24 nations, including the United States, have made carbon neutral targets part of their national policies. 132 nations worldwide have taken some action to become carbon neutral by 2050. The prospects and demand for sustainable investment options will only grow as a result of further regulation and environmental awareness.
How would the future look like?
Future predictions indicate that ESG and sustainable investment will continue to increase significantly. It is anticipated that 33% of all assets managed globally (not just domestically) by 2025 will have ESG obligations. Between 2018 and 2036, the sector is anticipated to grow 433%, culminating in $160 trillion in total worldwide assets. The International Finance Corporation projects that between now and 2030, there will be approximately $23 trillion in investment potential in developing nations as a consequence of the Paris Agreement, which was ratified in 2015.
Institutional investors are mostly responsible for this expansion. The biggest asset manager in Europe, Amundi, said that by the end of 2021, ESG will be included into all of its assets. The biggest asset manager in the world, Blackrock, has pledged to boost its sustainable assets from $90 billion in 2019 to $1 trillion by the end of 2029. According to 83% of institutional investors in Europe, sustainable investment has gained importance.
Final words
As you can see, sustainable finance is making news as of now. It is the high time for you to think about getting your hands on sustainable finance. Since the demand is continuously increasing, it is worth to get your hands on sustainable finance now, so that you can reap maximum benefits that it will offer in the future.
