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ESG Investing: From Tipping Point To Turning Point

The Blue Water Team

Investments in environmental, social, and governance (ESG) funds has been growing steadily over the last decade. However, hindered by questions about definitions, data, and choices, these investments have failed to become an integral part of most investment portfolios. 

The current crises surrounding the COVID-19 pandemic and racial protests have brought into sharp relief the necessity of taking action to better society. For investors, this action looks more and more like using ESG funds as a foundational and guiding element of portfolios. 

One indicator (of several) of the increasing attention being paid to ESGs is the dramatic uptick in signatories to the Principles for Responsible Investment, a collection of six principles that help to guide investors' decisions toward ESG-thoughtful investments. In the first quarter of 2020, the number of signatories to the PRI increased by 28 percent, 8 percent more than 2019's total increase.

In this article, State Street Global Advisors identifies three trends they believe will accelerate ESG funds adoption by eightfold over the next decade. 

COVID-19

The first of these trends is the transformative perspective created by the COVID-19 pandemic. In the wake of the pandemic, vulnerable populations have suffered the most. One Federal Reserve report found that 40 percent of pandemic-related layoffs was of individuals who made less than $40,000 a year. 

Investors have begun considering how they can use their investments to counteract these inequalities and incorporate the social and governance aspects of ESG funds. These changes are moving ESG investments into the realm of personal choice and conviction. 

Changing Investment Approach

The second trend consists of major changes in how investors approach their investment choices. Since the onset of the pandemic, ESG ETFs and index funds have enjoyed steady flows of investment, even as other types of investments saw declines. Investors have found that ESG investments may protect portfolios against economic downturns. 

In addition, new efforts to partner with leading ESG data and analytics companies have begun to improve access to reliable data that can help drive investments in ESG funds. 

The advent of ESG ETFs has also facilitated the adoption of ESG funds because these ETFs are more cost-effective and therefore make ESGs more available to more people. Finally, with the assistance of experienced investment experts, the many choices in ESG ETFs can be narrowed down to a number of options that offer customization without overwhelming investors. 

Family Values

The third trend is the desire of boomers to pass their wealth (upwards of $48 trillion in the next 25 years) on to their children. As families spend time together under stay-at-home orders, and as an estimated 35 percent of children live with their parents, conversations around legacy planning and inheritance become more common. 

In light of these conversations, and the desire of Baby Boomers and their children to invest according to their values, ESG investments present an appealing option. 

The combination of all three of these trends could mean that ESG investments are likely to experience significant growth over the next few years. If you would like to learn how we can incorporate ESG investing into your portfolio, please contact us.