As you have probably heard Greta Thunberg had quite a 2019 which resulted in her being named the 2019 Time person of the year. The level of attention she has brought to the climate crisis is quite astonishing especially considering she was 16 years old for most of 2019.
At the 2020 World Economic Forum in Davos, against a backdrop of mass demonstrations across the world during 2019 and the ongoing wildfire disaster in Australia, climate change was top of the agenda for the first time signalling it as the most important global issue of our time.
It was during 2019 that I first came across the term the ‘Greta Thunberg Effect’, in relation to carbon offsetting initiatives, but I started to wonder if this movement would also have an impact on the investment world.
You have probably heard of ESG investing, the ESG standing for Environmental, Social and Governance which are considered the most important aspects of a company when measuring the impact of their business from both an environmental and social perspective.
ESG or SRI (Socially Responsible Investing) assets and portfolios have been around since the early 1970s but the movement really started to gather pace thanks to Kofi Annan’s 2004 initiative to incorporate ESG principles into capital markets which led to the launch of the Principles for Responsible Investment in 2006 of which thousands of companies are now signed up to and as of 2018 has around $90 Trillion invested under its ESG framework.
The uptake over the last 4 years before 2019 was relatively steady at around $5b of new investments each year into ESG assets. In 2019 this shot up with records inflows of almost $20.6b in new assets according to Morningstar, almost four times as much as in 2018 and part of this can be attributed to the climate change movement and therefore to some unknown degree a ‘Greta Thunberg effect’.
The increasing importance of ESG investing and its new position in the investment world was demonstrated by Larry Fink, the CEO of Blackrock – the world’s largest ETF provider, who famously (in our industry at least) and unusually devoted his entire annual letter for 2020 to ESG investing.
The ‘Greta Thunberg effect’ is not the only factor for increasing interest and investment in ESG assets. Another important factor is the ever increasing availability and decreasing cost of ESG Funds and ETFs, thanks partly to the improvement and availability of screening technology. There are now hundreds of ESG Funds and ETFs, whereas just looking back three years ago the options were very limited in comparison. The increased competition and improved technology has also reduced costs, with average charges having reduced some 80% over the last 3 years, which has brought the costs of ESG investing into line with regular investments.
We have noticed that our clients are increasingly interested in ESG investing and in some cases only want to invest in ESG assets. We believe that this trend will increase and ESG will rise over the coming years to match traditional investment portfolios and possibly at some point become the norm.
In particular we serve as independent financial advisors to staff working for the United Nations both here in Italy and across the world. By the nature of their career choice, these individuals tend to be more conscientious in their choices and are embracing the opportunities we offer to invest their long term savings in a more ethical manner.
As regulated financial advisers we work in accordance with MIFID II regulations, and in 2019 some additions were made to the rulebook in relation to ESG investing. In particular that Advisers must discuss ESG investing with clients as part of their suitability process, to explain how they work and to ascertain if the client has any preferences which should be taken into account.
Although these changes are yet to be fully incorporated by the FCA (UK) and CONSOB (Italy), who we look to for guidance, due to the limitations of ESG investment offerings. With the increasing number of options becoming available it will not be long before these rules will be incorporated.
It is also likely that most people will be interested in taking an ESG approach as according to a Morgan Stanley survey 85% of investors are interested in sustainable investing and that increases to 95% of millennials. If they are actively discussing ESG with advisers then this can only lead to a greater uptake.
If this is the case then we can also expect ESG assets, and the underlying investments within them, to experience greater growth than those which do not qualify as ESG compliant as more money will be flowing into those assets via ESG Funds and ETFs. Therefore, if this trend continues, there is a real incentive for both investors to invest in ESG assets and for companies to make sure that their businesses are operating in a way which allows them to be included in ESG assets.
At Valiant Wealth we are delighted to see this increased interest and uptake in ESG investing, whether it’s’ down to the Greta Thunberg or not! We can provide access to a range of ESG solutions, both model ESG portfolios in multiple currencies as well as more bespoke solutions for larger investments using a dedicated discretionary fund manager, where we use a detailed ESG questionnaire to cater to the exact demands of the individual or institution.
Please get in touch if you would like more information or to discuss how you can invest in ESG or how your current investments or pensions could be adjusted to ESG.