In 2021, investors continue to embrace environmental, social, and governance (ESG) investments at record levels.
In the first quarter of 2021, global ESG fund inflows outpaced the last four consecutive quarters, reaching $2 trillion. But while ESG gains rapid momentum, the CFA Institute shows that 33% of professional investors surveyed feel they have insufficient knowledge for considering ESG issues.
To help investors understand this growing trend, this infographic from MSCI helps provide a fact check on five common ESG myths.
1. “ESG Comes at the Expense of Investment Performance”
Fact Check: Not necessarily
Worldwide, ESG-focused companies have not only seen higher returns, but stronger earnings growth and dividends.
| Returns by ESG Ratings | Earnings Growth* | Active Return** | Dividends and Buybacks |
|---|---|---|---|
| Top tier | 2.89% | 1.31% | 0.28% |
| Middle tier | 1.35% | 0.12% | -0.02% |
| Bottom tier | -9.22% | -1.25% | -0.05% |
Source: MSCI ESG Research LLC (Dec, 2020)
*Contribution of earnings growth and dividends/buybacks to active return
**Active return is the additional gain or loss compared to it respective benchmark
In fact, a separate study from the CFA Institute shows that 35% of investment professionals invest in ESG to improve their financial returns.
2. “Investors Talk About ESG But Don’t Invest In It”
Fact Check: False
Global ESG assets under management (AUM) in ETFs have grown from $6 billion in 2015 to $150 billion in 2020. In just five years, ESG AUM have accelerated 25 times.
Today, money managers are focusing on the following top five issues:
| Top ESG Issues | Assets Affected | Growth in Assets Affected (2018-2020) |
|---|---|---|
| Climate change / carbon emissions | $4.18T | 39% |
| Anti-corruption | $2.44T | 10% |
| Board issues | $2.39T | 66% |
| Sustainable natural resources / agriculture | $2.38T | 81% |
| Executive pay | $2.22T | 122% |
Source: US SIF Foundation (Nov, 2020)
Meanwhile, over 1,500 shareholder resolutions focused on ESG-related matters were filed between 2018-2020. Not only are investors turning to ESG assets, but they are placing higher demands on corporate responsibility.
3. “ESG Investment Strategies Eliminate Entire Sectors”
Fact Check: Not necessarily
First, not all ESG investment approaches are exclusionary.
For instance, in North America roughly 51% of ESG ETFs used an ESG integration approach as of Dec. 31, 2020. In an ESG integration approach, ESG risks and opportunities are analyzed with the goal to support long-term returns.
By comparison, values and screens approaches, which accounted for over 22% of ESG ETFs in North America may screen out specific business activities, such as alcohol or tobacco, or sectors such as oil & gas.
| Percentage of ESG Type | Integration | Values & Screens | Thematic | Impact |
|---|---|---|---|---|
| North America | 50.9% | 22.5% | 20.7% | 5.9% |
| Asia | 57.8% | 34.6% | 3.8% | 3.8% |
| Europe | 30.8% | 60.6% | 8.6% | 0.0% |
| Australia | 28.6% | 71.4% | 0.0% | 0.0% |
Source: Refinitiv/Lipper and MSCI ESG Research LLC as of Dec 31, 2020 (MSCI Feb, 2021)
Second, companies are assessed on a sector-specific basis where ESG leaders and laggards are identified within each sector in comparison to peers. In other words, ESG doesn’t mean eliminating exposure to entire sectors. Instead, investors can choose from a range of companies based on their ESG ratings quality.
4. “ESG Investing Is Only For Millennials”
Fact Check: False
Although ESG is popular among millennials, ESG investing is being driven by the entire investor population. In 2019, one study finds that 85% of the general population expressed interest in ESG investing.
| Interest in Sustainable Investing | General Population | Millennials |
|---|---|---|
| 2019 | 85% | 95% |
| 2015 | 71% | 84% |
Source: US SIF Foundation (Nov, 2020)
Sustainable investing goes far beyond millennials—ESG disclosures are quickly becoming requirements for key industry participants, such as institutional investors and listed companies.
5. “ESG Investing is Here to Stay”
Fact Check: True
Climbing 28% in 2020 alone, over 3,000 signatories have committed to the UN Principles of Responsible Investment. As of the first quarter of 2021, 313 global organizations and 33 asset owners have been newly added.
| Growth of UN PRI | Number of Signatories* | AUM Represented |
|---|---|---|
| 2020 | 3,038 | $103.4T |
| 2019 | 2,370 | $86.3T |
Source: UN PRI
*As of Mar, 2020
Central to ESG’s growth is the availability of ESG investments. ESG investing has become more widely accessible—which wasn’t always the case. Over the last decade, the global number of ESG ETFs has grown from 46 to 497.
Why the Facts Matter
As ESG investments continue to play an even greater role in investor portfolios, it’s important to focus on data rather than prevailing ESG myths that are not backed by fact.
Given the recent momentum in investment returns and ESG adoption, data-driven evidence empowers investors to build more sustainable portfolios that better align with their investment objectives.
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Source: https://www.visualcapitalist.com/the-biggest-companies-in-the-world-in-2021/
