Will the Shift Towards ESG Investing Last?

As recently as 2013 Exxon was one of the most valuable publicly traded companies on the planet. In early October 2020, Exxon was briefly dethroned as the world’s most valuable energy company before quickly gaining back the title the following day. It may come as a surprise however, that the company challenging Exxon for the title was NextEra Energy, one of the nation’s largest renewable energy companies and one of the biggest generators of wind and solar energy in the US.

This example is clearly illustrative of the trend toward increased investor awareness of - and demand for - environmental, social and governance (ESG) considerations when constructing their portfolios. While sustainable investments have been around for decades, they have quietly been gaining momentum both in fund inflows as well as profitability. According to Morningstar Direct, sustainable funds saw a record $10.5 billion of inflows in the first quarter of 2020, while global sustainable fund inflows toped $45.7 billion.1

In its’ scope, ESG investing goes far beyond just “environmental” considerations, however there are several underlying factors that could further deepen this trend toward ESG investments in the coming years, specifically on environment related investment opportunities. A combination of an uptick in general objections to fossil fuels and increased political calls for “green” infrastructure spending could help boost clean energy investment, a major component of the ESG investment universe. It is also clear that political decision makers and congressional spending will be a big component in shaping the efficacy of ESG investing in the coming years.

However, ESG investing has also run into some criticisms, chief among them are the metrics used to qualify a company’s ESG impact. Measuring a company’s “social consciousness” is inherently subjective and attempts to quantify or qualify them as such can result in moral gray areas. At the very least, it seems clear that we are only at the beginning of an understanding of the connection between investment performance and a company’s social impact, and thus truly being able to quantify that impact.

In a recent letter to investors addressing sustainable investing, BlackRock investments wrote, “Because sustainable investment options have the potential to offer clients better outcomes, we are making sustainability integral to the way BlackRock manages risk, constructs portfolios, designs products, and engages with companies. We believe that sustainability should be our new standard for investing.”2 While only time will tell if sustained ESG fund inflows continue, the statement signifies an awareness by large investment institutions of the importance of sustainable investing in the long run, signaling that the investing style is here to stay.

  1. MARKETS, Sustainable investing is set to surge in the wake of the coronavirus pandemic PUBLISHED SUN, JUN 7 20207:32 AM EDTUPDATED SUN, JUN 7 20204:02 PM EDT
  2. https://www.blackrock.com/corporate/investor-relations/blackrock-client-...