The Enduring Power of Sustainable Investing

[An update to content originally published on November 06, 2023]

9 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 that most US consumers — particularly younger ones — are willing to pay extra for more sustainable products.¹ Institutional investors also allocate trillions of dollars to sustainability-aligned investments across public and private markets. October 2023 research from Capital Group across 25 countries found that 90% of investment professionals had adopted ESG in their investment approach.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 multiple factors that suggest ESG is here to stay:

Reason 1: We’ve reached a critical mass of allocated capital

Investors are not just talking about ESG; they’re putting their money where their values lie. A 2022 PwC report³ projects that global asset managers will increase ESG-related 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.

Reason 2: Policymakers have enacted regulation

Global policymakers have set frameworks to align businesses and investors to tackle global sustainability challenges, with regulators deploying those frameworks in their local markets. Underscoring the growth in global ESG regulation, 2023 research from ESG Book found that regulation increased by 155% over the past decade.⁴

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.

Reason 3: A shift from “ESG” to “sustainability”

As sustainability takes center stage, the industry increasingly favors the term “sustainability” over “ESG.” This linguistic shift represents the industry’s development of a more nuanced understanding of the indicators driving sustainability-aligned finance impact. Investors and companies rely less on abstract scores and more on specific attributes to measure how businesses operate responsibly and ethically.

Reason 4: Asset owners are driving adoption

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:

• Lack of sustainability-aligned investment products
• Data overload in the public markets
• Data scarcity for private markets.

As a result, these “challenges” are often seen as opportunities for innovation and growth in the sector.

Reason 5: 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.

Reason 6:  Investors seek transparency and trust

Greenwashing scandals and misdirected ESG claims have eroded some investor trust. Investors want detailed, framework-aligned sustainability metrics and evidence of real, measurable impact. Increased corporate engagement from asset managers puts pressure on companies to commit to, measure, and make progress toward sustainability targets.

Reason 7: The need to manage “non-financial” risks

Traditional financial models often overlook systemic risks stemming from factors like environmental disasters, social welfare, and cybersecurity. These risks, once considered edge-case events, now pose ongoing financial threats to businesses and investors. Available data and metrics allow investors to proactively identify and mitigate these ‘non-financial’ factors. Integrating ESG into a comprehensive risk management strategy future-proofs portfolios and protects long-term returns.

Reason 8: Growing interest in impact investing

Beyond simply avoiding negative impact, many investors have raised capital to generate positive change through direct investments aligned to specific sustainability dimensions. Examples include renewable energy infrastructure, sustainable agriculture, or community-based development funds. As investors and allocators see returns from these strategies, demand for impact investment vehicles will continue to rise.

Reason 9: Innovation breeds new financial opportunities

The sustainability sector has been a driver of technological and business model innovation. Companies are pioneering carbon capture technologies, developing sustainable materials, or rethinking existing products and services for a circular economy. These advances offer new and potentially lucrative opportunities for investors who want to balance sustainability desires with target returns.

In an informal survey of participants who joined our recent webinar, ESG 2.0: The Future of Regulation, Data Integration, and Sustainable Investing, we asked participants about the challenges they face in incorporating ESG into their investment processes. Perhaps not surprisingly, respondents reported challenges with manual processes, a lack of a centralized platform, multiple data vendors and tools, and report layers as hindrances to their investment processes. As innovation breeds incredible change, firms need a platform that can grow in lockstep and enable them to manage the complexities of their ESG investments.

Understanding the Path Forward

To learn more about sustainable investing and how you can ingest, normalize, transform, and report on your ESG data, watch our on-demand webinar ESG 2.0: The Future of Regulation, Data Integration, and Sustainable Investing.

Author:
Eashwar Viswanathan
Eashwar is Vice President of Product Management at Arcesium. In this role, he leads product management for the institutional asset management segment.

Sources: 
1 Consumers care about sustainability – but will they pay more? April 10, 2023, National Retail Federation
2 ESG Global Study 2023, Capital Group, October 2023
3 ESG-focused institutional investment seen soaring, PWC, December 20, 2022
4 Global ESG regulation increases by 155% over the past decade, PR Newswire, June 2023

 

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