At Black Swan Capital, we speak a lot about ESG investing and apply the philosophies to the way we operate ourselves, including how we recommend and manage client assets. ESG stands for Environmental, Social, Governance and are core principles that direct investing that is considered, social, ethical and environment friendly.
When it comes to investing, it’s the performance and returns that are often the focus. Yet, as we have written about previously, there is evidence to suggest that good ESG investments have outperformed the broader markets.
As ESG investing grows, trends for 2021 are emerging. The financial institution Morningstar reported a 77% increase in investing into ESG funds in Europe in 2020 compared to 2019. ESG is quickly becoming mainstream as investors become increasingly aware of issues such as global warming, climate change and ethical work practices.
A significant change for 2021 will make it easier for investors in the EU that want to invest in ESG. Up to now it has been difficult to measure just how ethical an ESG investment really was. From March this year, in the EU, fund managers must be clearer in how they report and justify their ESG credentials as well as including an ESG impact alongside their financial reporting. Furthermore, later in 2021, advisers, like Black Swan Capital will have to start considering environmental sustainability in the advice process. We see this as good news, and as something we are already doing, a good opportunity for clients. As money is expected to keep flowing towards ESG funds, here are five ESG trends to keep an eye out for in 2021.
1. Renewed focus on the health sector
Unsurprisingly, following a year where Covid-19 has dominated headlines, health is expected to become a key area of focus within ESG criteria. This will be split into two areas.
First, opportunities within health firms. The pandemic highlighted the innovations and opportunities of those operating in the health sector, from those behind groundbreaking research to firms that are part of supply chains. The health crisis has been a part of ESG criteria for many firms before the pandemic but this has largely focused on an ageing population. The pandemic has helped bring the work the sector does, and the opportunities it brings, to the forefront.
Second, mental health has become an important topic that’s far more openly discussed than it was in the past. Businesses that embrace positive workplace environments and mental wellbeing programmes for employees could benefit. There’s plenty of research to link happy, healthy employees to greater productivity and creativity too.
2. Climate change continues to rise as a key issue
In 2015, the Paris Agreement was made. This legally binding treaty on climate change aims to limit global warming to two degrees Celsius. Over the last five years, many positive steps have been taken around the world. But to meet agreed targets, this will need to rapidly increase in the coming years.
It’s expected that climate change will rise on the agendas for both investors and businesses as governments take more action. For large institutional investors, the EU disclosure rules on ESG will be an increased opportunity to engage with companies at a stakeholder level to encourage change in business practice.
3. Biodiversity crisis moves to the forefront
Once again, the Covid-19 pandemic is playing a role in this trend and it builds on some of the environmental aspects of tackling climate change. The last year has highlighted how important outdoor spaces are, and it’s expected that this will lead to biodiversity rising up the agenda for policymakers, and in turn investors.
Protecting natural habitats and creating green spaces for communities to enjoy is set to become more prominent. Businesses that find ways to reflect this in their operations or actively support protecting biodiversity in local areas could benefit.
4. Corporate reporting set to boom
Fuelled by growing consumer interest, businesses will publish more information about their corporate responsibility and ESG initiatives. This is good news for engaging more businesses to incorporate ESG issues, but it presents challenges for investors too. More reporting means even more information to verify, review and compare when making investment decisions. This is where the new EU requirements on ESG reporting on funds will help. It will also help to weed out those that are overstating their green credentials, also know as ‘greewashing’.
5. Investors focus on inequality
This focus covers both the ‘social’ and ‘governance’ factors of ESG and is partly driven by the pandemic. It’s anticipated that there will be an increased focus on how businesses operate, treat their employees and engage with wider supply chains. With the pandemic highlighting how many keyworkers are on low incomes, inequality within businesses is going to become an important ESG topic. This could include looking at pay ratios within businesses, executive remuneration and other areas.
ESG is moving into the mainstream
ESG investing isn’t a new concept, but it’s only in recent years that’s it begun to gain traction. With ESG investments on the rise, the biggest trend of 2020 could be that it moves from being a relatively niche consideration to the mainstream.
While in the past, ESG investing has been driven by ‘doing good’ with your money, more data and choice than ever before will mean a growing body of evidence that shows how ESG does good for your money as well.
Please contact us if you’d like to discuss your investment portfolio and ESG investing opportunities. We’re here to help you create a portfolio that reflects your risk profile that is driven by your principles and your objectives.