ESG is evolving into a commanding force set to grow exponentially. In partnership with The Financial Times, TrackInsight published data showing that AUM in ESG ETFs skyrocketed three-fold from just under $59bn at the end of 2019 to just over $174bn at the close of 2020, conveying a rise of nearly 200 per cent. Forbes reported that insight from Price Waterhouse Consulting shows that by 2025, 60% of mutual fund assets will be ESG related.
Due to this predicted growth we have been exploring ESG investments, breaking down each letter of the acronym to deep diver into each strand of the investment category. This time, we will be looking further into the E (Environmental) and what this means for the year ahead.
January was significant for the environmental part of ESG investments as newly inauragted US President, Joe Biden made the decision to rejoin the 2015 Paris agreement, signaling a new era for America regarding climate change and green investments. At the same time, The Financial Times published that the delayed COP26 conference in Glasgow this year will also push the challenge of mitigating climate change will be a key priority for governments, investors and regulators. As a consequence, an increasing number of institutional investors are incorporating ESG metrics into their capital allocation.
Under the E strand of ESG, there has been a greater shift towards sustainable and green finance. The topic of green finance has become increasingly popular on a global stage and established itself as a talking point in the investment banking world. This has been accelerated even more since the COVID19 pandemic began, Santander confirms.
So: what exactly falls under the umbrella of sustainable and green finance? Green finance can include green bonds or investments that seek to promote or support environmentally driven projects and sustainable infrastructure. This can include investments that support climate change mitigation, resource conservation and sustainable development.
One key topic within green finance is the race to zero when it comes to carbon emissions. The United Nations Framework Convention on Climate Change (UNFCCC) describes this as a global campaign that seeks to bring together leadership and support from businesses, governments, regions, cities and investors for a resilient, healthy, zero carbon recovery that safeguards the future, creates employment and fuels inclusive and sustainable growth.
In September 2020, it was reported that the amount of commitments to reach net zero emissions from business and governments approximately doubled in less than a year. The increase in commitments has been accelerated by COVID-19 and investors are increasingly placing capital towards companies who are developing low-carbon technology and creating green business models (Morgan Stanley).
Another potential category that falls under the environmental strand of ESG investments includes water. The World Health Organization has predicted that by 2025, over half of the global population will be living in water-stressed areas. Cerulli Associates, a research and consulting firm that specialises in asset management, private banks and wealth managers believes that the concentration of climate change will continue to grow within the investment sector. However, the firm predicts that there will be a shift from solar energy to water. This has been evidenced within their most recent survey, that over 90% of European ETF providers thought that water-themed investments would be in demand from investors in the next one to two years. The research conducted included responses from 37 of Europe’s largest ETF issuers and managers, with a total of €740bn in assets under management, The Financial Times confirmed. Investments into water could therefore be a viable strategy for investors moving forward.
As we draw closer to the end of Q1 in 2021, it is clear that investments and industry discussion surrounding the E for ESG will continue to grow.
If you would like to talk to Linear’s Discretionary Fund Management team, please email email@example.com