The keys to ESG investment in 2021 in the face of growing interest and profitability

Experts agree that ESG investment, which has soared in recent months, is here to stay. More and more investors are looking to use their money not only for a clear search for profitability but also for a commitment to climate, social and corporate governance issues. 

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Greater interest in sustainable investment 

In fact, according to the data provided by the XI Inverco Observatory Survey, where it has asked a wide expert of managers representing more than 92% of the total assets invested in Investment Funds, 53% of the entities consulted have registered Funds that follow this line of ESG responsibility. 

“For nine out of ten fund managers, investors are aware of the existence, purpose, and value of this type of fund, although 55% of them limit it only to institutional investors,” they added: “However, two thirds of fund managers (67%) have noticed an increase in the interest of participants, although most of the entities do not distinguish between investment profiles, although 26% do point to investors with a balanced profile as those who have increased their assets in this type of vehicle.” 

On the other hand, 42% of the entities surveyed do consider that this interest in more sustainable investment is the result of a greater impulse from the entities themselves. In these data, the generation of millennials (currently between 28 and 40 years old) is the most aware of ESG investment. It is followed by centennials (those aged 18 to 27). “For 39% of the fund managers, this is a trend that had already been detected some time ago, while 26% point to the increased interest in this type of investment in the media,” they explained. 

Jaime Raga, head of client relations at UBS AM Iberia, pointed out that “we are seeing a greater awareness on the part of investors in terms of sustainable investment. Thus, there is greater interest in financing the shift towards a low-carbon economy, supporting sustainable and inclusive growth AND improving portfolio risk management in the face of the challenges of the 21st century.” 

The ten trends that mark the ESG in 2021

Raga believes that “fundamental political processes and developments, such as COP 26 at the global level or the new US administration’s approach to climate issues, will help to foster the commitment of governments, legislators, investors and fund managers” and adds: “We believe that, if sustainability factors, risks and opportunities are taken into account, investors can protect their portfolios without compromising profitability.” 

In this way, the fund manager considers that there are ten key trends when investing in ESG in 2021. 

The first is based on investor engagement, as investors are expected to demand better sustainability data from companies, as well as clear and quantifiable energy transition plans. “This will accelerate disclosure and commitments in 2021,” Raga pointed out. 

The second focuses on impact investing, as investors increasingly take ESG considerations into account as a whole. “The next step is for investors to focus on opportunities to identify and address sustainability goals in areas ranging from climate change to inequality to healthcare,” he said. 

Electric transportation is the third trend on the list, as UBS AM Iberia believes that the transportation sector may be totally disharmonized by 2040. “Many industry players think that our forecast of electric vehicles having a 40% share of global new car sales in 2030 is too high; we think it could be too low,” they clarified. 

The management company is also optimistic on the fourth point, on net zero, where they say “as more countries set zero emissions targets by mid-century, we think it will be critical to slow and eventually halt new investment in the fossil economy and channel more investment into essential adaptation measures.” 

Big Oil would be their fifth trend, where they do not see this energy transition as a risk for the oil majors, but see it as “a potential opportunity for them to become part of the solution. The energy transition may require 1.1 trillion dollars of investment per year, something inconceivable without the current companies”. 

The sixth point has to do with diversity and inclusion, factors that may become key in determining a company’s economic success or downfall in the next decade, according to Jaime Raga. “The year 2021 could see major breakthroughs as we begin to close the data gap in measuring diversity,” he added. 

Plant-based “meats” is forecast to reach $51 billion by 2025, something they comment is a 3x increase in market penetration from 2019 levels.

The eighth point has to do with climate stress testing. “2021 will likely be the year when investors and financial institutions incorporate climate transition analysis. Five years from now, some central banks may seek to establish capital taxes for carbon, which would have a profound impact on the cost of capital for polluters,” they explained. 

Sustainable data and the so-called transparency revolution are the ninth and tenth items on the list. When it comes to sustainable data, major index providers and market data companies are rushing to create or buy sustainability offerings. “Demand for sustainability data could drive the size of the market for data and related services to over $5 billion in the next five years,” they stated. 

What they have dubbed “the transparency revolution,” is predicated on the fact that the race of competing regulations has ended in a truce-and collaboration-demanded by investors and regulators. “Higher quality, decision-relevant and comparable sustainability data is just around the corner.”

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(Featured image by nattanan23 via Pixabay)

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