ESG & Impact Investing
An industry mega-trend.
Environmental, Social and Governance (ESG) and impact investing have fast become a mega-trend within our industry  that is difficult to ignore. As our world continues to evolve rapidly, investors are increasing their focus on investing in ESG and impact opportunities that are critical to support positive change.
It is interesting that while this trend was initially driven by investors who wanted their investments to do good while doing well, asset managers and the companies in which they invest are starting to include ESG and impact considerations into their businesses models at an increasing rate .
At the same time, there appears to be an acknowledgement by global governments, some of whom have been unable to address these issues due to a lack of funding or desire (or both), that solutions to such problems should be driven by the private sector who can more efficiently mobilize talent and capital to solve these important issues .
It is into this void that stakeholders have ventured, and who seek collectively to bring about change. This has not only seen the rise in interest in ESG and impact investing but has ushered in an evolution from socially responsible investing (SRI) focused on ‘doing no harm’, to ESG and impact investing that seeks to benefit society in general and tackle specific problems .
This is a leap-forward in ESG and impact investing and can be positive for investors, for the societies in which we live, and for the world that we inhabit.
The Changing Face of Business
Increased transparency, accountability and results orientated reporting.
There is increasing evidence that investors do not have to sacrifice economic returns in order to invest in a manner that is consistent with their values. Studies have shown that companies who consider ESG and impact issues have attractive investment characteristics such as a decreased cost of capital, lower volatility and fewer instances of fraud and malfeasance. This is broadly attributed to the increased transparency, accountability and results orientated reporting that such firms hold themselves to which help drive these positive relative returns .
Such outcomes have helped increase the value of U.S. assets managed within ESG or impact strategies to roughly $12 trillion in 2018 – up 38% since 2016 and 4 times greater than they were in 2010. This figure represents 26% of the nearly $47 trillion in assets that are professionally managed domestically .
Shifts in Capital Allocation
Gender and demographic influences.
Complementing the positive performance results are factors driven both by the supply of and demand for private capital.
Firstly, by the end of 2020 it is estimated that women will wield significant influence over financial decisions. A report by the Economist Intelligence Unit expects that women will control approximately 32% of global wealth . To put this into perspective, this would represent around $72 trillion in asset under management. Perhaps even more important however is the fact that women are more likely than their male counterparts to consider ESG and impact when making investment decisions . Such a shift can be expected to increase allocations to ESG and impact strategies.
Additional demand is also expected due to the coming intergenerational wealth transfer from baby boomers to millennials, estimated to be $68 trillion over the next 30 years . Of this amount, it is expected that a large amount of this capital will find its way to ESG and impact investments, continuing their growth. Contributing to this positive trajectory are such generational characteristics as the results of a recent survey that found that close to 75% of millennials believe that their investments can directly influence climate change, and that they are twice as likely to invest in companies that have a positive impact .
The Funding Gap
Private capital opportunities.
Looking at the supply side, asset managers we have spoken with estimate that the industry needs $6 trillion in public and private capital annually to meet the demands of the UN sustainable development goals. Considering current investment and projected government spending, there remains a funding gap of close to $3 trillion. Of this amount, it is expected that low returning, capital intensive projects will be funded with public capital, leaving private capital and the managers thereof to exploit opportunities in ESG and impact projects that are more venture and philanthropically focuses, and for which an attractive market rate return exists.
Momentum suggesting continued growth.
The momentum behind ESG and impact investing shows very little sign of slowing and will more than likely increase. From the massive changes in who controls global capital, to the increasingly positive performance characteristics, one thing is now clear. ESG and impact strategies need to be seriously considered as part of the strategic asset allocation decision.
Close to 75% of millennials believe that their investments can directly influence climate change, and that they are twice as likely to invest in companies that have a positive impact.
1. UBS Asset Management, https://www.ubs.com/global/en/asset-management/insights/sustainable-and-impact-investing/2020/esg-a-game-changer.html, Accessed 6/15/2020.
2. On Impact: A Guide to the Impact Revolution, Sir Ronald Cohen, 2018.
3. On Impact: A Guide to the Impact Revolution, Sir Ronald Cohen, 2018.
4. On Impact: A Guide to the Impact Revolution, Sir Ronald Cohen, 2018.
5. MSCI, https://www.msci.com/what-is-esg, Accessed 6/12/2020.
6. Harvard Business School, The Impact of Corporate Sustainability on Organizational Processes and Performance, Eccles, R. G., Ioannou, I., & Serafeim, G., 2014.
7. US SIF Foundation, 2018 Report on US Sustainable, Responsible and Impact Investing Trends, 2019.
8. The Economist Intelligence Unit, “The New Face of Wealth and Legacy: How Women are Redefining Wealth, Giving and Legacy Planning”, 2018.
9. Morgan Stanley, https://www.morganstanley.com/ideas/sustainable-socially-responsible-investing-millennials-drive-growth, Accessed 6/12/2020.
10. Business Insider, https://www.businessinsider.com/millennial-millionaires-baby-boomer-inheritance-wealth-transfer-2019-10 , Accessed 6/12/2020.
11. Morgan Stanley, “Sustainable Signals, New Data from the Individual Investor”, 2017.