A company's environmental, social and corporate governance (ESG) standards are an important consideration for 53 per cent of high-net-worth investors, according to a 2018 survey by US Trust, part of Bank of America Private Bank. But for Generation X-ers that rises to 65 per cent and for millennials to 87 per cent. Millennials are also more likely to review the ESG impact of their investment holdings than any other age group.
Around the world, ESG investing is on the rise – with affluent, socially aware millennials in the vanguard. These younger investors want to make sure that the companies they back have high ESG standards.
Long-term thinking
But you don't have to be young or even altruistic to see the attraction of ESG investing. In recent years, a growing body of market data suggests that hard-headed investors can no longer afford to ignore ESG factors when building a long-term portfolio. “ESG is an attempt to understand all of the fundamental factors that you need to think about when making a long-term investment, hoping to make the best long-term return for your clients,” says Saker Nusseibeh, CEO of Hermes Investment Management.
Morningstar, the financial research and data company, has identified nine global ESG funds with a return of more than 13 per cent in the year to July 2019, compared with an average return of 10 per cent for funds in its Global Large-Cap Blend Equity category. A case can even be made that ESG investing is a solid defensive strategy in difficult times. In 2018, magazine Barron's list of the 100 “most sustainable” US companies collectively lost 3.2 per cent of their value, yet they still outperformed the S&P 500 index, which fell 4.2 per cent. Investors took note, with US funds that had an explicit ESG focus pulling in record total inflows of $5.5 billion in 2018, according to Morningstar data.
One way for investors to search for ESG opportunities is to consult the burgeoning array of market indices that follow and analyse the sector. These include the Dow Jones Sustainability Indices (DJSI), launched in 1999 as a set of global and regional indices tracking the performance of “leading sustainability-driven companies”. Today, DJSI cover almost 2,300 companies worldwide, with regional indices for every major market.
New parameters
Another way for investors to identify potential ESG opportunities is simply to look at the fast-changing world around them – and this is something younger people may be more in tune with than their parents' generation. Consider, for instance, the global energy transition already under way from fossil fuels to renewable sources such as solar and wind power.
The International Renewable Energy Agency (IRENA) predicts that total capital investment of $120 trillion in renewable energy will be required by 2050 for the world to meet globally agreed climate-change goals. Against this background, the asset management company Schroders forecasts that between 2017 and 2021, the average annual return on equity of companies in the MSCI Alternative Energy Index will nearly double to almost 10 per cent.
Clearly not all ESG investments will be winners. But with an eye for future trends and an ability to think long-term, millennials appear to be on strong ground for making social purpose a priority for their investments, and fund managers know that as more money flows into emerging areas such as renewable energy, they also have more chance of succeeding.
