Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
Investments into Environmental, Social and Governance (ESG) focussed funds could be headed for an important tipping point in the next few years, according to new forecasts.
PwC, the professional services firm, has predicted that the share of European assets held in ESG investments could more than triple from 15% today to 57% as soon as 2025 in a best-case scenario, meaning ESG assets will outstrip traditional investment strategies by that point. Under PwC’s base case forecast, ESG assets would rise to 41%. If that were to come to pass it could place downward pressure on those assets - company shares and bonds - which do not qualify as ESG.
There are always likely to be investors willing to buy shares in any company, whether they are sustainable or not, as long as those companies produce profits. If large parts of the market ignore those companies, however, investors in them may have to recalibrate their valuations downwards on the basis that they are likely to see permanently less demand.
The PwC forecast was reported in the Financial Times today, with the newspaper stating that it is large institutional investors driving the trend. More than three-quarters of 300 investors, including pension funds and insurance companies, surveyed by PwC said they would stop buying conventional funds in favour of ESG products by 2022.
The forecast comes with a degree of uncertainty, of course, but the trend towards ESG is clear. Large investors are increasingly aware of pressure to ensure the money run on their behalf is invested in accordance with sustainable principles.
For many investors, however, investing in ESG is now as much about future-proofing returns as it is future-proofing their reputation. The pandemic appears to have added more momentum to this trend, both in terms of returns and investor appetite for ESG.
Here at Fidelity, work by our equity analysts during the early stages of the pandemic analysed the stock market performance of companies that ranked highly on Fidelity’s in-house sustainability scores. It showed that they held up much better than companies that ranked poorly.
There may be specific reasons why an ESG approach has outperformed. Avoiding oil companies - which were already dealing with an historic crash in the oil price before Covid-19 hammered global growth and demand - is likely to have boosted ESG funds. There may also be a longer-term trend at play, with investors now seeking out companies with a more clearly sustainable future in light of the pandemic.
Investing via ESG funds is the most practical way for them to gain exposure but, if you are considering investing this way it requires proper understanding of how your chosen fund invests to ensure that you are getting what you expect in terms of ESG credentials.
More on ESG investing
Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. The Investment Manager’s focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that at times compares unfavourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.