The Enduring Power of Sustainable Investing

Five Reasons Why Sustainable Investing Is Here to Stay

Ever since environmental, social, and governance (ESG) entered industry vernacular in 2006, the term has gained both momentum and scrutiny. Critics label ESG as mere virtue-signaling, debating its financial substance. Many also argue that ESG investing lacks the financial returns to substantiate its value. Demand for sustainability-driven investment products and businesses tells a different story.

A survey published by the National Retail Federation shows a majority of US consumers – particularly younger ones – are willing to pay extra for more sustainable products.^[1] Institutional investors are also allocating trillions of dollars to sustainability-aligned investments across public and private markets. Research supports the thesis that an ESG investment lens outperforms a traditional one over a longer time horizon, especially at the sector level. New York University’s Stern School of Business exploration of 1,000+ individuals found that improved financial performance due to ESG becomes more marked over time.^[2]

Continued demand and expanding research indicate that ESG is far from a passing trend. Underpinned by new regulatory frameworks for both institutional investors and corporations as well as a consumer shift toward sustainability we’re seeing several factors that suggest ESG is here to stay:

• We’ve Reached a Critical Mass of Capital Allocated to Sustainability
  Investors are not just talking about ESG, they’re putting their money where their values lie. A 2022 PwC report projects global asset managers will increase ESG-related assets under management (AUM) to US$33.9 trillion by 2026. This is up from US$18.4 trillion in 2021. With a projected compound annual growth rate of 12.9%, ESG assets are on pace to constitute 21.5% of total global AUM in less than five years. The continued capital allocation to exchange-traded funds, mutual funds, and sustainability-aligned businesses reinforces the permanence of ESG.
• Policymakers Have Enacted Regulation
  Policymakers have set frameworks to align both businesses and investors to tackle global sustainability challenges, with regulators deploying those frameworks in their local markets. For instance, the European Union’s Sustainable Finance Disclosure Regulation (SFDR) and increased corporate reporting requirements via the Corporate Sustainability Reporting Directive (CSRD) are already in effect today. Prescriptive recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD) also offer a preview of ESG’s increasing importance in regulatory frameworks. The regulatory momentum and requirements around sustainable investing and reporting demonstrate this is not a fleeting trend.
• A Shift from “ESG” to “Sustainability”
  As sustainability takes center stage, the industry is increasingly favoring the term “sustainability” over “ESG.” This linguistic shift represents the industry’s development of a more nuanced understanding of what indicators drive sustainability-aligned finance impact. Investors and companies are relying less on abstract scores and more on specific attributes to measure how businesses operate responsibly and ethically.
• Asset Owners Are Driving Adoption of Sustainable Investing
  Asset owners are putting greater pressure on asset managers to provide sustainability solutions. Many asset owners are implementing direct impact investment strategies in private markets and passive sustainability index tracking strategies in public markets. That move signals a profound shift toward ESG principles as a long-term investment strategy. That said, challenges do remain. These include the lack of sustainability-aligned investment products, data overload for public markets, and data scarcity for private markets. As a result, these “challenges” are often seen as opportunities for innovation and growth in the sector.
• Firms Are Receiving Much-Needed Support
  Data-first SaaS and service providers are adding value by integrating powerful datasets, developing sustainability modules, and offering regulatory reporting solutions. These contributions help market participants navigate the operational complexities of ESG implementation, ensure compliance with evolving regulatory standards, and empower firms to incorporate ESG into their decision-making.

Customer demand, regulatory pressure, and the sheer volume of investment flowing into ESG-compliant companies all underscore its staying power. The transition to sustainability appears to be a journey that investors will continue to undertake – for the benefit of both business and society.

Sources

[1] Consumers care about sustainability – but will they pay more? April 10, 2023, National Retail Federation
[2] ESG and Financial Performance, Rockefeller Asset Management and NYU Stern

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