When investing, it’s the performance and returns that are often the focus. Yet, more investors than ever are also considering ESG (environmental, social and governance) factors when deciding where to invest. As ESG investing grows, trends for 2021 are emerging.
In 2020, investors placed nearly four times the amount of cash into responsible investment funds than they did in the previous year, according to figures from the Investment Association. In the first nine months of 2020, £7.1 billion was added to responsible investment funds. The figures indicate that far from being a fad, ESG is becoming an essential part of portfolios for many investors.
ESG investing is still evolving and responds to topical issues around the world. Here are five trends to keep an eye out for in 2021.
Unsurprisingly, following a year where Covid-19 has dominated headlines, health is expected to become a key area of focus within ESG criteria. This will be split into two areas.
First, opportunities within health firms. The pandemic highlighted the innovations and opportunities of those operating in the health sector, from those behind groundbreaking research to firms that are part of supply chains. The health crisis has been a part of ESG criteria for many firms before the pandemic but this has largely focused on an ageing population. The pandemic has helped bring the work the sector does, and the opportunities it brings, to the forefront.
Second, mental health has become an important topic that’s far more openly discussed than it was in the past. Businesses that embrace positive workplace environments and mental wellbeing programmes for employees could benefit. There’s plenty of research to link happy, healthy employees to greater productivity and creativity too.
In 2015, the Paris Agreement was made. This legally binding treaty on climate change aims to limit global warming to two degrees Celsius. Over the last five years, many positive steps have been taken around the world. But to meet agreed targets, this will need to rapidly increase in the coming years.
It’s expected that climate change will rise on the agendas for both investors and businesses as governments take more action. For large institutional investors, like pension funds, there’s also an increased opportunity to engage with companies at a stakeholder level to encourage change in business practice.
Once again, the Covid-19 pandemic is playing a role in this trend and it builds on some of the environmental aspects of tackling climate change. The last year has highlighted how important outdoor spaces are, and it’s expected that this will lead to biodiversity rising up the agenda for policymakers, and in turn investors.
Protecting natural habitats and creating green spaces for communities to enjoy is set to become more prominent. Businesses that find ways to reflect this in their operations or actively support protecting biodiversity in local areas could benefit.
Fuelled by growing consumer interest, businesses will publish more information about their corporate responsibility and ESG initiatives. This is good news for engaging more businesses to incorporate ESG issues, but it presents challenges for investors too. More reporting means even more information to verify, review and compare when making investment decisions.
One of the challenges of ESG reporting is that there is no standardised way of delivering it. This can make it incredibly difficult to compare firms against ESG criteria. It is one of the reasons why ESG funds may have higher fees.
This focus covers both the ‘social’ and ‘governance’ factors of ESG and is partly driven by the pandemic. It’s anticipated that there will be an increased focus on how businesses operate, treat their employees and engage with wider supply chains. With the pandemic highlighting how many keyworkers are on low incomes, inequality within businesses is going to become an important ESG topic. This could include looking at pay ratios within businesses, executive remuneration and other areas.
ESG investing isn’t a new concept, but it’s only in recent years that’s it begun to gain traction. With ESG investments on the rise, the biggest trend of 2020 could be that it moves from being a relatively niche consideration to the mainstream.
While in the past, ESG investing has been driven by ‘doing good’ with your money, more data and choice than ever before will mean a growing body of evidence that shows how ESG can support long-term investment goals. As a result, it could drive even greater interest in incorporating ESG factors into decisions for investors.
Please contact us if you’d like to discuss your investment portfolio and ESG investing opportunities. We’re here to help you create a balanced portfolio that reflects your risk profile and goals.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.