ESG investing: From buzzword to mainstream

A growing interest in environmental, social and governance (ESG) issues is driving record inflows into the ESG-led investment sector. During 2020, sustainable funds available to European investors attracted net inflows of €233bn¹, which saw assets under management hit the $1.1tn milestone, accounting for almost 10% of total European fund assets.

A similar growth story in the US saw assets under management for responsible investing (RI) funds rise from $940.5 bn² on 31 December 2020 to $1,007tn on 31 March 2021. If we look at the global picture, ESG assets are now on track to exceed $53tn by 2025³, representing more than a third of total assets under management.  The above research aligns with Mazars’ data regarding the growth of ESG investing in Europe, the US and Asia. While the ESG universe is still emerging in the US, it is more mature in Europe and other parts of the world. In response to the growing public interest in ESG assets and investment opportunities, advisers and funds have expanded their approach and increased the number of ESG product offerings.

Political and regulatory influences

Indeed, this global focus on sustainability ensures that investors’ awareness is raised on the environmental and social benefits of investing responsibly. However, product comparison may become more complex as different ESG strategies feed into offerings to gain a competitive advantage as investment opportunities grow. 

There are also different regulatory and political influences and approaches to take into account. In the US, The Biden administration and Chair Gensler have made it very clear that putting some regulatory “teeth” around how to regulate the asset management industry and their ESG claims. In Europe, the EU Taxonomy and Sustainable Finance Disclosure Regulation (SFDR) aims to improve the visibility of asset management ESG strategies by expanding disclosure and reporting requirements. 

The burden of growth

So as the political intent to regulate the ESG investment sector continues, a common international disclosure framework looks some way off due to different levels of ESG market maturity and conflicting regulatory goals. While Europe is more advanced in its regulatory timeframe, in the US, where the ESG sector is still relatively young, emphasis is being placed on the burden for public companies to provide investors with the potential additional disclosures. Questions such as how asset managers have gauged investor interest in ESG products, what ESG information they need for issuers, and how European mandates have been factored into their decision-making are ongoing. 

Notable drawbacks to a common international disclosure framework highlighted by US Commissioner Hester Peirce in April 2021 include the potential for standardised metrics to constrain decision making and stifle innovation. Plus, unlike financial accounting, ESG metrics are not readily comparable across issuers and industries. Additionally, a stakeholder-focused regime would increase costs, decrease the attractiveness of US financial markets, and distort the allocation of capital. 

As it continues to grow at a fast pace, there is little doubt that the ESG investment sector has moved from buzzword to mainstream. While this is good news, being mainstream brings the political and regulatory challenges of reducing confusion and burden in the reporting space. How we get there and, importantly, when will be vital for investor confidence.

References:

¹ https://www.morningstar.co.uk/uk/news/209411/sustainable-funds-record-breaking-year.aspx

² https://lipperalpha.refinitiv.com/2021/04/u-s-esg-and-sri-funds-assets-under-management-break-the-1-trillion-mark-in-q1-2021/

³ https://www.bloomberg.com/professional/blog/esg-assets-may-hit-53-trillion-by-2025-a-third-of-global-aum/