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Wealth & Investment Management

Key themes for ESG Investing this year

Posted by on 01 February 2021
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What’s on the horizon for sustainable investing this year? Find out what key trends are likely to impact the ESG space in 2021 and what it might mean for you, according to Morningstar.

2020 proved to be a big year for sustainable investing. Despite the unusual and somewhat devastating turn of events that the world watched unfold, sustainable investing was still very much at the forefront of investors’ minds last year with impressive inflows across the board.

Irrespective of the Covid-19 market sell-off in March, the European sustainable funds universe attracted inflows of €52.6 billion in the third quarter of 2020. This was slightly down from €55.5 billion in the second quarter but represents a bigger share (40%) of overall European fund flows. Globally, inflows into sustainable funds were up 14% in the third quarter of 2020 to $80.5 billion.

It looks like this momentum is set to continue into the year ahead. Although it may be difficult to foresee what 2021 has on the cards after the unpredictable year we’ve just experienced, there are some key themes that will play a big role in the sustainable investing space. Here’s a glimpse of what to expect.

Climate change

As the need for a global transition to a low-carbon economy becomes ever more apparent, climate change looks set to be high on the corporate and public agenda this year.

One of the positive outcomes of the coronavirus pandemic is that it’s forced people and companies alike to think more about climate change and how our behaviour impacts the world around us. During the first lockdown, there was a substantial drop in air pollution directly as a result of reduced transportation and industrial activity. This was perhaps the first time on a global scale that the negative effects of how we currently live and work (and the benefits of putting that on pause) were really brought to light. People can no longer think of climate change as an abstract idea that isn’t going to affect them, or one that they don’t actively play a part in.

As a result, this year we’re going to see more companies talk about climate change and disclose more information on how it will affect businesses. Investors not only want to make more informed decisions about where they chose to invest, but many care about climate change and the impact that their decisions might have on a larger scale.

Social issues and Human Capital Management

The "S" factor in ESG considerations will be of particular importance this year. Social issues cover things like diversity and inclusions, and employee engagement and skills development.

Unfortunately, the pandemic has only served to exacerbate social and gender inequalities and accelerate structural changes in labour markets. A recent report from McKinsey Global Institute on Covid-19 and gender equality shows that while women make up roughly two-fifths of the global labour force, they have suffered over half of the total job losses caused by the pandemic. This is largely because the crisis has amplified the burden of unpaid care for the likes of the elderly, school children and the sick – roles which women hold by a disproportionate majority.

The devastating impact on many people’s livelihoods over the past year means companies now face growing pressure to take accountability for the way they treat their employees and the individuals in their supply chains, as well as the diversity of their workforce and management boards.

We’ve also seen a considerable shift to remote working in the past 12 months as offices around the country were forced to close. Unfortunately, this has led to inevitable redundancies. Investors are now likely to look at how well-prepared companies are for a future where new technologies may cause further redundancies or require the rescaling of entire workforces.

ESG moving mainstream

Sustainable investing has been quietly on the backburner for some time now, but what was once considered as a niche investment area looks set to become mainstream in the year ahead.

Asset managers have already responded to this transition and changing investor preferences by launching a flurry of climate-aware funds and tweaking existing strategies to incorporate sustainable objectives. In the last decade, for example, over 580 conventional funds in Europe have repurposed into sustainable-focused strategies, including 477 (81%) that changed names to reflect their new sustainable mandate.

We’re also going to see higher inflows into these ESG-focused funds as product disclosure starts improving, especially in Europe, thanks to tightening regulations. In order to meet its 2050 carbon-neutrality goal, the EU is ramping up its sustainable finance efforts - back in March 2018 it adopted a 10-point action plan on sustainable finance with an aim to channel capital flows towards sustainable investment while managing financial risks stemming from ESG issues. Most of the implementation of these regulations will continue this year meaning ESG factors will be at the forefront of every investment decision and no longer viewed as preferential considerations.

Of course, there are many other trends that are likely to shape the ESG space this year. Overall though, it looks to be a prosperous year ahead for the sustainable investing universe thanks in some part to the remarkable year that’s just passed.

Find out more about sustainable investing with Morningstar here. 

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