Growth of ESG investing in Europe

Marta Zadravec

The green revolution was in the focus before, but according to the latest data, the growth of ESG investing is here to stay. Investors around the world are demanding socially and environmentally conscious options. Moreover, for the first time since WWII, we sense a shift in which climate will become a priority of governments.

In addition to the increase in environmental awareness, when coupled with technology disruption, green stocks start a new trend in equity markets.

The push toward ESG (environmental, social and governance) investing is not just about the potential returns, as consumer demand is outpacing the market.

Growth of ESG investing in Europe became a focus for investment companies. Moreover, European countries have adjusted their regulatory outlook in including sustainability factors in the financial sector.

Financial returns on ESG investing

There is growing recognition in the industry of the link in incorporating ESG issues into portfolio management. ESG criteria cover issues that would not traditionally be covered by financial analysis. However, ESG issues do have financial implications. Such considerations include corporate culture and climate change.

The holistic approach of ESG integration into investment processes covers a wide range of factors. The integration of ESG includes investment and risk management processes, governance, technological and team resources.

Also, the emergence of the availability of data sources has made it easier to integrate ESG criteria into the investment process. Better methodologies allow for better interpretation of the data.

Moreover, a significant amount of research suggests a positive correlation between companies that incorporate ESG investing principles. In the Journal of Sustainable Finance & Investment, out of 2,200 studies on ESG, 90% showed either a positive relationship to Corporate financial performance (CFP) or at least no-negative relationship. So, we can come to the conclusion that ESG can not harm company performance.

Investors are aligning their responsible investing goals with long-term financial risk adjusted performance. Investment firms are increasingly aware of ESG factors and this, in turn, is influencing their investment offerings and product strategies.

Growth of ESG investing from 2019

Industry experts say 2019 was the year environmental, social and governance investing became the new normal. In a chapter published in the IMF’s October 2019 Global Financial Stability Report, researchers found the performance of “sustainable” funds is comparable to that of conventional equity funds. The IMF estimates there are now more than 1,500 equity funds with an explicit sustainability mandate. Here we look at some key figures that underline the ESG growth.

Source: IMF, World Bank

There was a big change over the past years in the way wealth managers use sustainable funds. Whatever the approach they use, experts recognise the growth of ESG investing as an integral part of the investment process. Patrick Thomas, Investment Director, Head of ESG Investments at Canaccord Genuity Wealth Management claims ESG is a structural trend. The Canaccord Genuity is, in fact, one of the first firms to launch an ESG-dedicated portfolio service.

Both academic and industry research has demonstrated that ESG investing has not harmed investors. Moreover, investors have experienced similar returns and often with lower volatility. Thus, leading to improved risk adjusted returns.

To sum up, the key ingredient in product development will be the cost of incorporating sustainability in the investment model to remain competitive and attractive to investors. Integrating ESG into the investment process is more important now than ever. In addition, a rising number of investment funds are considering the implementation of the ESG policy into their entire investment process. Further analysis of the ESG models by the industry could help tackle the ESG risks. Therefore, an in-depth analysis of ESG investment model could be beneficial for your business.