However, the trend line is unmistakable: ESG investing has been growing for a while. Between 2017 and 2019, ESG investing grew by more than a third, to more than $30 trillion, over a quarter of the world’s professionally managed assets.1 Some estimates say it could reach $50 trillion over the next two decades.2
But exactly what is ESG investing? Some think it is all about investing for impact. Others think it is about imposing a certain set of values on companies.
ESG investing is about informing better decision-making by adding the assessment of material environmental, social and governance issues into the investment process. It enriches traditional research such as analysing financial statements, industry trends and company growth strategies.
Benefits of ESG investing
ESG investing comes with several benefits, the main one being the feel-good factor. ESG investments may be helping the environment and building a better future for the next generation or tackling crucial social issues and encouraging a more diverse and inclusive workplace.
As a result, more investors have made the choice to switch to ESG investing – and they have been met with a flood of ESG funds.
Although choice can at times be a good thing, wide-ranging ESG definitions, debates about terminology and data – and data quality in particular – and an explosion in investment selections have created more confusion than conviction.
The emergence of ESG indices and ESG Exchange Traded Funds (ETFs) has made it easier for ESG-focused investors to reposition their core holdings. But before deciding which ETF to invest in, investors should look under the hood – what is the underlying index, what is the total cost of ownership and does it align with my investment values?
Pandemic highlight’s ESG’s lower-profile “S” Pillar
Historically, the ‘E’ in ESG has taken the spotlight, with vital emphasis on mitigating climate change through corporate and investor action. The climate story was not forgotten in 2020, and indeed many people revelled in the fact that lockdowns caused emissions to fall.
However, the challenges that COVID-19 inflicted on workforces and underprivileged parts of the population made corporate social responsibilities more relevant, increasing the focus on the ‘S’ in ESG and new means of measuring it.
In the United States, while President Biden has rejoined the global effort to curb climate change, it is too early to gauge the administration’s impact on social issues. However, the inclusion demonstrated by Biden’s cabinet picks sends a reinforcing message on the importance of diversity.
Inflection Point
Although the ESG tide has been rising for decades, we believe ESG investing has now reached a critical inflection point. Investors’ lingering reservations about ESG investments seem to have eased and they are increasingly ready to take a stand with their investment choices.
We believe it is time for ESG investing to move from a check-the-box component of investment portfolios to a must-have ingredient in portfolios.
That’s why last year we launched the SPDR® S&P®/ASX 200 ESG Fund (ASX: E200). This was the first ETF to track the S&P/ASX 200 ESG Index, a broad-based, market-cap-weighted index designed to measure the performance of securities meeting sustainability criteria, while maintaining similar overall industry group weights as the S&P/ASX 200 Index.
This means for the first time, investors will be able to access improved ESG exposure with a similar risk-return profile to the Australian equity market benchmark, the S&P/ASX 200 Index.