ESG Perspectives
ESG , and more specifically climate , is a key theme throughout the survey . With 64 % of respondents anticipating greater focus on climate following the UN ’ s COP26 summit in November , it is clear the shift towards greater sustainability is one that cannot be ignored by investors over the next decade .
ESG is definitely a strong theme coming through in the survey . Where is the growing demand coming from and have we reached a tipping point ?
The COVID-19 crisis has given an additional boost to the trend for ESG adoption that had begun before the outbreak of the pandemic . ESG ETF inflows reached $ 107bn during the first nine months of 2021 , compared to $ 92bn in 2020 overall and a meagre $ 32bn in 2019 , according to Bloomberg .
In the institutional market ESG adoption is highly advanced particularly in Europe , however , we are far from reaching a tipping point on ESG adoption globally , with growing interest from institutional investors in the US and Asia . We also note that retail investors have only recently begun to incorporate ESG strategies in their portfolios , leaving plenty of room for further penetration .
What do you see for the future of ESG ?
This is a big question , with many answers ! For the near term , we see a number of themes . We expect engagement to play a key role , with ESG becoming a powerful tool to drive change that is increasingly intertwined with the fundamental assessments of each company . Ensuring your passive manager is truly committed to the stewardship of your capital is essential .
As the net-zero emissions initiative has demonstrated this year , there is a growth of global ESG themes driven by powerful narratives emerging from both the markets and society as a whole . We see tackling social inequality as a key future theme as governments focus on this issue during the recovery phase .
Emerging markets present a huge opportunity for ESG improvement both in the broad sense and in thematics such as clean water and education . There is also an important role for stewardship in this area , with asset managers able to engage with governments , corporates and supranationals .
Finally , we anticipate somewhat of an ESG regulatory ‘ revolution ’ for 2022 and early 2023 with the implementation of Taxonomy and SFDR coupled with the introduction of ESG preference for investors with MiFID II … not forgetting the revision of BMR .
Matthieu Guignard
Global Head of ETF , Indexing and Smart Beta Product Development and Capital Markets Amundi
How early is the market in terms of ESG adoption ?
We are still at a nascent stage in adoption of ESG investment strategies . As the transition to a lower carbon economy builds momentum , we expect a vast reallocation of capital within financial markets . US investors , in particular , have been slow to adopt ESG investment principles , despite their relative size advantage . At the end of 2018 , total assets committed by US investors to sustainable and responsible investment strategies were broadly the same size as Europe ’ s commitment , at circa $ 12trn , despite the significantly larger size of US capital markets .
This year saw a renewed emphasis on decarbonisation from governments globally through the COP26 Glasgow Climate pact . As such , we expect the continued growth in the green or climate bond market , especially as initial green debt issuance from governments such as the UK and EU has been met with overwhelming demand in 2021 .
The fast evolution of the green bond market , from niche to a mainstream asset class of over $ 1trn in value in just over a decade , is an example of the speed of innovation within financial markets to address ESG goals . The Bank of England meanwhile has led by example , adjusting its corporate bond purchase scheme to achieve a reduction in carbon intensity and a long-term commitment to net zero . We also expect a continuation in the shifts of consumer preferences towards sustainable products and an accelerated transformation of industries to provide investors an expanding opportunity-set .
With the longevity of global environmental and social policy initiatives and structural societal challenges , such as climate change , ESG is an investment theme that will continue to dominate investors ’ thinking in 2022 .
James McManus
CIO Nutmeg
ETF Scan : The Big Picture | 19