ESG Investing: The Opportunities and Challenges for 2021 and beyond

Print First published: February 26th 2021; Last Updated: February 2nd 2022

'Give it 20 years, and most of the wealth will be transferred into the hands of the younger generation, which grew up with ESG at the top of their minds. ESG investing will be the norm. It will simply be called investing”

ESG (Environmental, social and governance) is a hot topic today. 2021 has already been called the 'Year of ESG' and investors are watching the markets closely.

2020 was packed with forces driving the ESG revolution – from COVID-19 to social media and organized movements. The next stage of the ESG revolution is concerned with the acceleration of ESG factors integrating into the investment process and changing the public stance on prominent issues.

On top of this, we have shareholder activism. Shareholder activism has been growing in the last 10 years and companies are being held to account, being called out for “good washing” and “greenwashing”. Various leaders can now speak up and step up to their pledges – this can make an excellent marketing story if it yields results. Give it 20 years, and most of the wealth will be transferred into the hands of the younger generation, which grew up with ESG at the top of their minds. ESG investing will be the norm. It will simply be called “investing”. The question is how can we speed up this process and how shall this new world look? How do you deliver value?

Investment decision-making is crucial for the direction the world is headed – capital and profits encourage behaviour and the lack of capital discourages it. Investors are faced with a limitless choice of vehicles and questions about the permanence of the stagnation. Considering the bad reputation finance professionals are burdened with since the Financial crisis, the industry can now take an additional step towards a positive change.

One of the main challenges is the lack of standardization in ESG measurement and reporting. The data we have now is messy and incomplete. The investing community depends on the reliability, availability and comparability of the sustainability reports. There is certainly lots of space to encourage greater corporate disclosure to reflect the true operations of companies. Data cleaning will come essential for this process. 

What can we do? First, we must provide investment professionals with appropriate educational materials to understand ESG metrics. The quantity of such materials is growing at a rapid rate – from the CFA Institute providing a CFA certificate in ESG Investing to CAIA quickly incorporating ESG into its training materials. Secondly, we must increase the quantity and quality of research completed within the field of ESG. Thirdly, banks must reform their instruments. For instance, we already see funds specifically allocated to ESG. Goldman Sachs launched its first equity fund in conjunction with GS Sustain, integrating ESG research into its investment approach.

Considering that this is a global, long-term shift, we can expect further regulation and improved frameworks. Changes such as these are never easy, and they must occur at both micro and macro levels. With the mainstreaming of ESG, the world has the power to shift consumer preferences and demand for sustainable products. Generation Z will have a big part to play in the ESG revolution, with their well-known focus on public issues, trends and authenticity. Consequently, 2021 is about encouraging conversation. Conversations can then spark collective action.  

Meanwhile, investment managers have to be resilient and employ their dynamic capabilities to evolve their practices along with the guidance they are given by the regulatory bodies. These developments, along with Big Data and AI, can certainly be capitalized on and used to source competitive advantage. So, my last question is - with the digitization of economies, what kind of new global governing bodies should we expect to appear?

Share this article