Many industries have been upended, new trends created and some accelerated by the coronavirus. In the investment world in particular, the COVID-19 pandemic has proven to be a turning point for investment in environmental, social and governance (ESG).
The strategy for investing has been around for decades, but in recent years it has been booming. Freed from a variety of misconceptions and investor mistrust that held it back, ESG investing, also known as sustainable or responsible investment, is now having its best days. ESG issues are now key economic determinants for a growing group of investors and businesses.
It’s not very surprising that in a world currently dominated by COVID-19 sustainable investment is having another banner year in 2020, with record capital flowing into ESG funds.
ESG in the UAE
In the UAE, the adoption patterns for sustainable funds are in line with global trends. A UBS Global Wealth Management report surveyed more than 5,300 millionaires in 10 markets, including Brazil, China, Germany, Hong Kong, Italy, Singapore, Switzerland, the United Arab Emirates, the United Kingdom and the United States and found that the UAE had the highest adoption rates for sustainable investments even before the pandemic.
The study further showed that UAE investors expect sustainable investment to rise from 53 percent to 66 percent over the next five years. Three quarters of investors (75 percent) expect it to become the standard in a decade, handily beating the global average of 58 per cent.
Then came the COVID-19 crisis, which supercharged demand for ESG-enabled investment instruments.
The pandemic has increased the importance of risk mitigation in investment strategies arising from natural and man-made calamities. Issues related to politics that were in the background have roared to life again. Coronavirus, California wildfires, Australian bushfires, global warming, renewable energy and equality between race and gender; everything is on the table and falls under the umbrella of the ESG now.
For the same reason, alongside traditional financial metrics, the events of the recent past would cause investors to place greater focus on a company’s ESG performance. This could also mark a tipping point for the ESG market.
ESG funds are now attracting record amounts of cash because of their market-beating results. In a year filled with great uncertainty, sustainable funds continue to deliver the best conventional funds.
The recent investment data bear out these assertions. A September study by the Morgan Stanley Institute for Sustainable Investment found that in the first six months of the year, sustainable funds not only minimized investment risk during the pandemic, but also outperformed their traditional peers by nearly 4%.
For many reasons, the ESG investing trend is here to stay. The demographic change that will sustain the trend is one of the most significant of these.
When considering investment opportunities, millennials cite ESG investing as their top priority. This is important because in the next few years, the largest-ever generational transition of wealth from baby boomers to millennials will take place, likely to be about $30 trillion, experts claim.
At the heart of ESG investment is the idea that businesses that promote stronger corporate ethics, respect for human dignity and responsibility for the environment will produce more economic value over time. Increasingly, the pandemic has highlighted that businesses will only survive and prosper if they operate with a nod from the wider public approval court.
In order to benefit from the increase of interest in ethical investment, businesses with good ESG credentials are well placed. A number of businesses, including Walmart and Apple, have been pushed by the increasing regulatory and investor demand for sustainability to clean up their legislation and introduce aggressive green initiatives with the promise of a cleaner tomorrow.
Investors are acutely aware that it is possible and increasingly important to make a profit while protecting humans and the world positively and proactively. Moreover, if you are an investor, you can now select from a variety of cause-specific funds, including funds for clean energy, fossil-free funds, women’s leadership funds, or even vegan funds.