What is the outlook for ESG funds?
With a projected compound annual growth rate (CAGR) of 12.9%, ESG assets are on pace to constitute 21.5% of total global AuM in less than 5 years. It represents a dramatic and continuing shift in the asset and wealth management (AWM) industry according to PwC's Asset and Wealth Management Revolution 2022 report.
Global ESG assets predicted to hit $40 trillion by 2030, despite challenging environment, forecasts Bloomberg Intelligence.
ESG Fund Returns Recover, but Still Trail Conventional Peers by a Small Margin. The tech stocks that helped ESG funds and the utilities that hurt them in 2023. Sustainable funds performed much better in 2023 compared with 2022, but results were mixed across asset classes.
ESG assets have proven resilient despite economic and regulatory uncertainty — reaching $30 trillion in 2022, according to the GSIA — and we expect them to surpass $40 trillion by 2030, with a CAGR of 3.5% as the market matures.
We expect growth in ESG investing to continue through 2022, and well beyond. The shift to sustainable investing is so powerful because it's being driven by demand from the bottom up.
The success of ESG investing depends in some part on government policy. If legislators make a law which rewards ethical investing decisions, the funds can benefit greatly. A good example is policies which incentivise electric car purchases.
ESG risks, when poorly managed, can have a significant impact on a company's reputation, finances and long-term viability. The effect of these risks can range from fines and legal penalties to loss of customer, employee and investor confidence.
However, there are also some cons to ESG investing. First, ESG funds may carry higher-than-average expense ratios. This is because ESG investing requires more research and due diligence, which can be costly. Second, ESG investing can be subjective.
Missing out on returns from the so-called "Magnificent Seven" tech stocks was one of the biggest reasons for underperformance. Meta, Alphabet, Tesla and Amazon were all excluded from certain ESG indexes due to ESG controversies or because they had a high ESG risk relative to others in their sector.
Activist investors are expected to carry out fewer environmental and social campaigns this year after the strategy proved less lucrative than other shareholder agendas, according to business consulting firm Alvarez & Marsal Inc.
Who are the biggest investors in ESG?
BlackRock ranked as the biggest ESG asset manager, accounting for 20 of the top 100 such funds, with total assets under management of $110 billion. DWS Group came in second place with $36 billion in AUM (comprising 11 funds), followed by Parnassus Investments with $33 billion (three funds).
ESG-focused institutional investment seen soaring 84% to US$33.9 trillion in 2026, making up 21.5% of assets under management: PwC report.
The survey found that, of the 98% of investors surveyed who assess ESG, 72% carry out a structured review of ESG performance, compared with just 32% in the previous survey conducted two years earlier. Moreover, many of those who currently use an informal approach, plan to move to a more rigorous regime (39%).
In the run-up to the pandemic and through 2022, ESG as an acronym became widely used. But until 2023, this use was largely unchecked. The term evolved to mean everything to every company, which in turn led to it meaning very little to those trying to isolate the signal from the noise.
Ethical and environmental issues are now mainstream concerns for many investors, but Castlefield has been specialising in responsible investing since its launch in 2002. Partner Rupert Lovesy tells us more about developing a specialist firm that practices what it preaches.
Socially responsible investing goes one step further than ESG by eliminating or adding investments based solely on a specific ethical consideration. For example, an investor might opt to avoid any mutual fund or exchange traded fund (ETF) that owns the stocks of firearms manufacturers.
The term ESG first came to prominence in a 2004 report titled "Who Cares Wins", which was a joint initiative of financial institutions at the invitation of the United Nations (UN).
Some supporters think the term has become so broad as to lose much of its meaning. Many point to the prevalence of greenwashing, which is when companies exaggerate the environmental benefits of their actions. Other criticisms focus on the way fund managers rank companies by how they're performing on ESG factors.
because there isn't an opt-out clause on ESG," said Ash, who is also the CEO of Emerge Earth, a company that aims to use artificial intelligence to provide real-time carbon emissions data. "Whether we like it or not, ESG already defines us and our profession in so many ways."
Critics of ESG — such as a group of Republican states that banned Blackrock and other “ESG friendly” asset managers from their state pension plans — argue that considering environmental and social factors violates the fiduciary duty that asset managers have towards their clients.
Do ESG funds perform poorly?
Yet Performance Was a Drag. Investors yanked a record $13 billion from U.S. sustainable funds in 2023, stung by mediocre performance and the continuing backlash against environmental, social, and governance investing.
ESG investing focuses on companies that follow positive environmental, social, and governance principles. Investors are increasingly eager to align their portfolios with ESG-related companies and fund providers, making it an area of growth with positive effects on society and the environment. S&P Global.
Pros | Cons |
---|---|
Can help investors diversify their portfolio | ESG funds may carry higher than average expense ratios |
May reduce portfolio risk | ESG investing is still a fairly new concept and there isn't a ton of reporting on performance |
When you choose ESG investing, you're putting your money to work in companies that strive to make the world a better place. This type of ethical investing strategy helps people align investment choices with personal values.
- Standardization and Data Gaps: There is a lack of consistent and standardized ESG data across companies and industries. ...
- Greenwashing: Some companies may engage in "greenwashing," making false or misleading claims about their ESG credentials.
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