Considering the difficult market environment since the beginning of the year, flows into sustainable funds still held up better than the broader market and anyone who considers that ESG is a bubble may want to hedge their bets.
Why is sustainable & responsible investing here to stay? And what are the key drivers?
One demographic wave driving assets under management (AUM) growth in responsible investment is that we are on the frontend of an extraordinary intergenerational wealth transfer, dubbed “The Great Wealth Transfer”. This refers to the massive movement of wealth from the Baby Boomer generation to the Millennials over the coming decades that will make purpose-driven Millennials the most influential investor group.
While estimates run the gamut, from $30 trillion to more than double that amount, the sums of this wealth transfer are historically enormous. The game-changing importance of this transfer is due to the decidedly different social, environmental, and financial investment perspective of Millennials who are predisposed to consider ESG in their investment decisions more than any previous generation.
On top of this demographic change, the topic is high on the agenda of regulatory and supervisory bodies globally, with the aim to increase transparency and liability. Both, corporate reporting requirements and technological innovation are making ESG data more available to the financial market boosting product innovation. Lastly, the global push to achieve net-zero carbon emissions by 2050 creates a great opportunity to develop portfolios that support this mission.
These trends are already reflected in the current data and are expected to continue to grow. According to Morningstar, assets in global sustainable funds tripled since 2019. At the first quarter of 2022, global assets of funds with a focus on sustainability, impact or ESG declined to $2.77 trillion. Considering the war in the Ukraine and the current market tumult, this is only a 4 percent reduction compared to the record breaking fourth quarter 2021 which is less pronounced than the 5.5 percent decline suffered by the broader market.
In addition, the mainstream market has started to integrate ESG issues more broadly across different asset classes. According to the Global Sustainable Investment Alliance, $35.4 trillion of global AUM consider certain ESG aspects more generally in their investment approaches in 2020 – about 35 percent of total AUM globally and a 15 percent increase compared to 2018. Assets that consider sustainability are expected to further grow to about $50 trillion by 2025 according to Bloomberg Intelligence.
Sources:
Morningstar (2022): Global Sustainable Fund Flows: Q1 2022 in Review
GSIA(2020): Global Sustainable Investment Review 2020
Bloomberg (2022): ESG by the Numbers: Sustainable Investing Set Records in 2021
