22 February 2022
2021 pushed ESG to the top of the agenda for many investors, businesses, and policymakers. COP26 reignited discussions about climate change; the pandemic exacerbated social inequalities; and the start of the BLM movement forced companies to rethink their diversity policies, to name a few key events.
Against this backdrop, investors poured a record-breaking amount of about $120 billion USD into sustainable investments in 2021 - more than double the $51 billion USD in 2020.
ESG is growing rapidly, and we’re confident that it’ll only continue to grow. Here’s what we can expect to come:
Pressure is mounting on companies to strengthen their ESG framework and integrate sustainability into their policies - and this pressure won’t be abating any time soon.
In a global survey of investors who assess ESG in their investments, 72% of respondents indicated that they carry out a structured review of ESG performance compared to just 32% of respondents in the previous survey just 2 years ago. And 39% of those who currently use an informal approach plan to move to a more structured approach.
In May 2021, shareholders forced oil giant ExxonMobil to take climate change more seriously when it overhauled the company’s board of directors, replacing 3 of the board’s 12 members. Meanwhile, 9 out of 10 investors backed a call for IBM to produce an annual diversity report. The message is clear: take action on corporate sustainability or risk falling behind in the new, socially inclusive and climate-conscious economy. From 2018 to 2020, shareholder activism grew from 2% to 12% for social campaigns and 2% to 6% for environmental campaigns¹.
Millennials and Gen Z are more likely to choose companies aligned with their values. And with Gen Z workers set to triple by 2030 in the US, there’ll be more people looking for purposeful employment over a fancy job title or high pay. According to LinkedIn research, professionals are proudest working at companies that promote work-life balance and flexibility (51%), foster a culture where they can be themselves (47%) and importantly, have a positive impact on society (46%).
These shifts are all happening against a backdrop of government and regulatory pressures. For example, the development of new legislation may force companies to address human rights violations in their supply chains. At the same time, governments worldwide have pledged to reach net-zero carbon emissions by 2050.
Read more about the environment and cleantech sectors that are set to grow.
The events of 2021 drove home the point for companies that purpose, and not just profit, matters. Integrating ESG into business operations and strategies helps gain public and shareholder trust. After all, a company that pays attention to its long-term prospects across its financial performance and environmental and community impact are better able to manage risks and likelier to fare well in adverse situations.
You only need to look at ESG performance to understand that profit doesn’t have to come at the expense of purpose. Last year, 7 of the 10 largest ETFs with a focus on ESG factors beat the S&P 500 index. In 2020, 52 of Morningstar’s 69 ESG-screened indices outperformed their broad market equivalents, and 57 of 65 ESG indices outperformed for the 5 years through the end of 2020².
We’ve even run the numbers and found that ESG drives an asset’s returns and provides diversification in a portfolio. Moreover, ESG performs well among other factors that affect an asset’s returns, such as an asset’s size, volatility, and dividend yield.
We believe that our investments can impact the world in meaningful ways. That's why we've recently introduced our Responsible Investing portfolio, a general investing portfolio that's optimised for both profit and purpose.
Here’s how our Responsible Investing portfolios compare to our General portfolios:
As you can see, the difference between the 2 portfolio types isn't great because our General Portfolios already have moderately high ESG scores. However, the Responsible Investing portfolio specifically filters for ETFs with high ESG scores. These ETFs may include energy companies that rely on clean sources and emerging market companies that consider climate change and human rights.
We use Morningstar and MSCI because they're some of the world's best-known index creators and fund-rating agencies. MSCI ESG ratings are letter ratings, ranging from AAA through to CCC. As it has 7 grades, we assign 7 points for AAA and 1 for CCC. Morningstar gives the overall score out of 5. The StashAway ESG score is an average of the 2 indices.
¹“Key trends that will drive the ESG agenda in 2022”, S&P Global, published 31 January 2022.
²“Why ESG is gaining importance in pre-IPO process”, Ernst and Young, published 14 January 2022.
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StashAway Management (DIFC) Limited (registration number CL 3982) is established in the DIFC pursuant to the DIFC Companies Law. Its registered address is Unit 1301, Level 13, Emirates Financial Towers, P.O. Box 507051, Dubai International Financial Centre, Dubai, United Arab Emirates.