As we enter the 1styear of the 2020 decade, the YIG team thought it would be interesting to discuss about the future likely trend of the financial market. The team have figured ESG investing, specifically regards to climate change, will have a significant impact on the market.
Whether you believe in Climate Change or not, the understanding of how a Carbon footprint impacts our climate is enough for people to rally behind a more sustainable future. Many global funds are turning green and this trend likely to quicken in 2020. Swiss investment bank Credit Suisse have predicted sustainable investing will be a mega-trend in the coming decade “Sustainable investing is a long-term trend that every investor needs to consider.” and “Ultimately, stocks with poor environmental, social and governance (ESG) credentials will trade at a discount”, said Credit Suisse Private Banking chief investment officer, Andrew McAuley.
Recently, BlackRock, the world’s largest fund manager, have decided to divest more than half a billion dollars in coal shares in all of their actively managed portfolios. Further, Japan’s Government Pension Investment Fund (GPIF), which is the largest asset holder in the world, from April 2020, will begin allocating US$1.5 Trillion to financial securities with environmental value. Groups including Aviva Investors and AXA Investment Managers have poured money into ESG in recent years and several are ditching thermal coal, including BNP Paribas Asset Management and Candriam. These are only some examples of financial giants shifting their capitals to sustainable assets.
This moving trend towards ESG Investment is entirely client driven. According to Nathan Lim, who is an executive director of Morgan Stanley Wealth Management and an ethical investing expert stated that “…generation change is driving growth in ESG Investing”. A research paper by Morgan Stanley, an American investment bank also highlights the shifting change in demographics through their research paper.
Many now may be wondering, “But does going green bring higher return? Aren’t you limiting your options and sacrificing returns by ESG investing?”
Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.
To answer this question, according to an article by Bloomberg, a financial, software, data and media company, identified that nine of the biggest ESG mutual funds in the US outperformed the US market index, S&P 500 in 2019.
The US$878 million Ave Maria Growth Fund was the top performer in 2019, followed by the US$3.8 billion Calvert Equity Fund and the US$4.9 billion Putnam Sustainable Leaders Fund. All of the three funds have gained more than 35%, as compared to S&P 500’s 31.5% return.
Further, an analysis conducted by Morningstar, a global financial services firm, found that 41 of the 56 Morningstar’s ESG indexes outperformed their non-ESG indexes. Lastly, a 2016 Harvard University study have found that in 80% cases, there was a proven link between sustainability and share price performance. ESG investing is not just limited to doing a good for the planet. It also helps companies to control costs and prepare the business to future economy.
With more information available online about the connection of Climate Change and our carbon footprint, it is something that is hard to ignore. There may not be a sudden spike in capital inflow towards sustainable-investment funds. However, it is now becoming evident that institutional and retail investors are shifting their capital to investments which do not contribute to an increase in climate and are aimed at a sustainable future.
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Jaewon Jung, Associate of YIG.