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Four Forces Influence The Rise In Sustainable Investing

The Blue Water Team

As sustainable investments gain traction, sustainable indexes and ETFs lead the way. Between 2015 and 2019, according to asset manager giant BlackRock, indexed assets grew from just 7 percent of the market to 16 percent of the market. BlackRock sees that upward trend accelerating in the future, estimating that investments in sustainable indexes and ETFs will skyrocket to $1.2 trillion over the next 10 years. In this article, BlackRock evaluates four forces that will drive that growth. 

Force 1: The Recognition That Sustainable Investments Deliver Results

The first major influence on the adoption of investment in sustainable ETFs and index funds, according to BlackRock, is the recognition that sustainable initiatives may actually improve investment returns. 

For example, businesses with high ESG ratings and strong sustainable index scores tend to deliver strong returns over time. These companies also tend to be more stable than their lower-scored counterparts.

On the other hand, certain ESG risk factors, like climate change, can negatively impact lower-scored businesses. The combination of strong returns and stability, along with an upward trend in the demand for sustainable investments, make sustainable investments an appealing choice for many investors.

Force 2: Improved Sustainable Indexes

The second major influence on the adoption of investment in sustainable ETFs and index funds, according to BlackRock, is a movement toward more standardized and informative sustainable indexes. 

Sustainable indexes are becoming more standardized and informative because of three trends. The first trend is the increase in the amount of ESG metrics being reported by businesses in response to a growing demand from investors and customers for sustainable business practices. 

The second trend is increased regulation from organizations like the EU that require many businesses to report their sustainability practices. The third trend is the introduction of frameworks that businesses can use to standardize the information they report. Together these three trends create sustainable indexes that investors can use with confidence.  

Force 3: Sustainable indexes and ETFs are cost effective

The third major influence on the adoption of investment in sustainable ETFs and index funds, according to BlackRock, is the falling costs of sustainable indexes. For example, the average iShares sustainable equity ETF costs only .22 percentage points, as opposed to the 1.15% cost for the average actively managed sustainable equity mutual fund. 

Force 4: Sustainable indexes and ETFs give investors choice

The fourth major influence on the adoption of sustainable investment in ETFs and index funds is the ability to choose from a wide array of industries, assets, and strategies. Between 2009 and 2019, the number of sustainable ETFs, for example, grew from 35 to more than 300. With more choices available, more investors can create a customized portfolio of sustainable investments. 

Investors interested in adding sustainable indexes and ETFs to their portfolios can do so in a number of ways, using these investment channels to achieve their personal investment and benchmark goals. 

ESG investing has been growing in popularity over the last few years and there are a lot more investment options available.  If you are interested in incorporating ESG investing in your portfolio, contact us and let us know what’s important to you.