ESG Focus | Jul 23 2020
FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:
This is the first article in a series covering the ESG and ESG-related megatrends that are framing investment flows in the 21st century. It sets the scene and the major parameters and metrics guiding investment flows for the near, medium and long term
ESG Focus: The Megatrend Is Your Best Friend
-Megatrends are transforming institutional investment approaches
-Creative-destruction concepts spawn ESG megatrends
-Naming the megatrends, sustainable themes and metrics
By Sarah Mills
The old saying “the trend is your friend” has proved the investor’s rallying cry through the ages, and this remains the case with ESG.
Megatrends have always set the stage for investment, be they population demographics, technological revolutions, or government driven regulation.
ESG has, in a very short period of time, emerged as a new global megatrend, muscling out its own space, sometimes in competition with other megatrends.
This is demonstrative of the power of vast swathes of capital at play. More than US$3trn in funds are being funnelled globally through direct ESG filters every year, and growing.
The most recent US SIF (Sustainable Investment Framework) Trends Report notes that funds channelled into general sustainable investment strategies is even larger, hitting US$12trn in the United States alone – or 25% of professional assets under management – as investors seek superior risk-adjusted returns or greater protection in uncertain times.
It’s the vibe
This megatrend has proved something of a quandary for many analytical investors given the lack of transparency and often anti-intuitive nature of ESG scoring through these filters.
ESG is also elbowing its way into the traditional megatrend territory and skewing long-standing investment practices, adding to confusion.
But it is a good match for trend investors.
The Economist posts this cracker of a quote on the subject of the scoring factors that claim to assess corporate performance based on ESG factors from United States Securities Exchange Commissioner, Hester Peirce:
“Labelling based on incomplete information, public shaming, and shunning wrapped in moral rhetoric”.
This is a fair comment. Investors are being asked to put their capital in the hands of those with sophisticated, opaque scoring systems, the only people it seems, with the wherewithal to process the vast amounts of information required to assess the rate of global corporate progress towards the 17 United Nations sustainable development goals (SDGs)
This is a development, a bit like high frequency trading, which has the power to disadvantage smaller individual investors – at least until technology becomes cheap enough to increase accessibility.
But small investors can still jump on the ESG bandwagon and prosper. Because ESG is a major trend that is continuing to build momentum, for the next few years at least, investors reweighting their portfolios intuitively to major ESG themes, using core sustainability metrics, are likely to be swept along with the tide.
This series of articles aims to simplify some of the guiding principles and unravel some of the mystery to at least lay down some broad themes for the avid trend investor.
What is a megatrend
The United Nations Principles for Responsible Investment (PRI) lists five megatrends: environmental challenges; society and demographics; globalisation and connectivity; emerging economy growth and dynamism; and technological advances.
PRI defines megatrends as global macro forces that transform business, marketplaces and society. They affect the financial system, capital allocation and environmental and social conditions, including the ability to deliver the United Nations Sustainable Development Goals (SDGs).
“Megatrends are omnipresent but growing in importance,” says PRI in its Responding to Megatrends report. “Increasingly, it is apparent that these should form part of all institutions, investment processes.
“Most institutions share a common belief that megatrend dynamics will result in multidimensional transformations across society, technology, economics, environment and politics (STEEP) ... to be framed within the context of an integrated system of real-world powerful forces altering the structure of economies, industries and global capital markets.”