- Corporate governance has become an important issue to many investors, as have climate change and racial justice.
- For those interested in upholding values surrounding social movements, ESG investments have been performing well.
- We spoke to several financial experts about why there's been such a surge in ESG demand, and how the pandemic is changing the industry.
- Because of their work, Business Insider named the experts interviewed in this article to our annual list of the 10 leaders transforming investing in Europe.
- Visit Business Insider's Transforming Business homepage for more stories.
There's been a surge in interest in environmental, social, and governance, or ESG, investment products this year.
According to a recent TD Ameritrade survey, nearly one-third of Americans have considered making socially-responsible investments. Globally, sustainable index mutual funds and ETFs doubled in assets under management over the past three years, to $250 billion, according to a Morningstar report.
The COVID-19 pandemic has doubtless had an impact.
"Since COVID, there are certain things that we feel have to be group solutions," said Steven M. Hughes, a financial educator, angel investor, and founder of the nonprofit Know Money.
Hughes is one of a growing number of young people becoming interested in ethical investing.
"With the Millennial generation, we are a values-driven and purpose-driven generation, and being in alignment with companies or people that share similar values—that's a non-negotiable for many of us," said Rich Jones, founder of the podcast "Paychecks & Balances."
That could be because many Millennials came of age right as the last global financial crisis hit.
"With the 2008 crisis there was a bit of a shift in terms of thinking—that corporations should benefit the world and should benefit society," Jones said.
Corporate governance has become an important issue to many investors, as have climate change and racial justice.
Happily, for those interested in upholding these values, ESG investments have been performing well. The S&P 500 ESG Index has outperformed the S&P 500 this year, up 15.21% year-to-date, compared with 13.49% for the S&P 500.
Cliff Feigenbaum, the founder and publisher of GreenMoney Journal, said ESG investing goes hand-in-hand with good financial performance over the long run.
"The truth is, these are bottom line issues," he said. "Waste costs money, pollution costs money, your reputation in the marketplace is vitally important in business today."
In other words, with ESG investing, you can do well—and do good.
Several of this year's Transformers work in ESG. We spoke to David MacDonald, founder of The Path; Edward Lees, a senior portfolio manager at BNP Paribas; and Ingrid Teigland Akay, managing partner at Hadean Ventures, about why there's been such a surge in ESG demand, and how the pandemic is changing the industry. Here's what they had to say.
Business Insider: Who is driving the push into ESG?
Lees: Millennials are value-led investors—and they're getting older and they're getting wealthier. So this whole demographic of up-and-coming, value-led, climate-conscious people is being joined at the same time with an explosion of democratizing investment products where you can go on your mobile phone and pick a theme and press a button.
MacDonald: The snag with these guys [Millennials] is they're not the ones with the money [yet]. But the other demographic that has come to the fore is the at-retirement and older generation—maybe people who have benefited from the massive economic expansion and [low housing prices]. Maybe they took a call from Extinction Rebellion. It's Mom and Dad who are not participating yet, but the squeeze is on them from both sides. They've got kids going, 'Hey Dad, what are you doing investing in lung cancer and killing the planet?' Then, grandparents [saying], 'We've got to do something for our grandchildren.' So I feel the middle is getting squeezed.
Business Insider: Why is there so much demand right now?
MacDonald: I think it's an emerging consciousness on the part of the investing public that their money has an impact. I guess in linkstep with that is, the investment management industry has woken up to the fact that the investing public have actually got a conscience and their behavior has to influence fund managers.
Lees: We've been building to this, whether it's Greta Thunberg, or Extinction Rebellion, or all the student organizations pushing for [change]—or whether it's that feeling that we've maybe crossed a tipping point.
Teigland Akay: I believe that the shock effect of a pandemic like this has been a driver, as people see that human-caused factors can have a profound impact on our lives. It has probably made a lot of people pause and think.
Business Insider: Can that demand last? Is there a risk of overcrowding?
Lees: Even if you have a very strong long-term secular growth theme that is structural, it doesn't mean the industry can't overshoot in the short term. And the more retail money in particular, but just the more money, that tries to flood into what's still a small sector…the more the risk you push the valuations past the sustainable point, and then they're going to have to fall back. We are seeing that in places. There are times this past year I've had to sell my position in what are really good companies.
MacDonald: If the question is, are these efforts overpriced, are we in a bubble, have you missed the boat? I don't think so. I think we've moved out of the innovation phase, but are still in the early adoption phase.
Teigland Akay: The shift, I believe, is permanent. However, I also believe that in the future, many investors will develop a stricter view on what ESG products are. The gluttony for ESG products has caused a very liberal view of what an ESG product is. This is likely to change…It will get more sophisticated in regards to measuring results.
Business Insider: How is the pandemic changing ESG investing?
Teigland Akay: The importance of innovative and effective healthcare has become very clear to everyone—and that investing in healthcare can be very rewarding on several levels. Furthermore, it is a contra-cyclical industry, which has also been a benefit this year.
Lees: I think we've all come to appreciate having cleaner skies in certain parts of the world and certain cities…But I also think coronavirus was a very powerful message of, 'Do not wait.' When you face an existential threat, do not wait to deal with it…I think that resonates with people, or should resonate with people, because the climate issue is existential, and it's bigger…By coming together and making a concerted effort, we can fix things much faster.
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