The coronavirus pandemic ushered in a new era of investing: a world where corporate profits are no longer the only measurement for investors. Instead, companies engaged in bettering the environment, improving social conditions, and diversifying their boards benefited from a wave of new investor money in 2020. And we’re just getting started.
The worst global health crisis since World War II, Covid-19 opened the eyes of people and businesses in search of a world that is better aligned with their deeper values. And while environmental, social, and governance investing trends were already in the making prior to March 2020, the crisis accelerated this consciousness.
This was clearly reflected in the demand and performance of ESG investments last year, and fund managers were more than happy to comply. They launched nearly 200 new ESG exchange-traded funds last year. ESG ETF assets tripled in 2020 to a record $189 billion, according to TrackInsight data. Investors funneled $97 billion into ESG ETFs, many of which delivered triple-digit returns.
The top three investor funds were Invesco Solar (TAN), Invesco WilderHill Clean Energy (PBW), and First Trust NASDAQ Clean Edge Green Energy Index (QCLN), soaring 221 percent, 200 percent, and 178 percent, respectively.
“It’s also clear that 2020 was a long-awaited turning point for ESG ETFs with huge growth in this sector,” said Anaelle Ubaldino, head of ETF research and investment advisory at TrackInsight. “With competition for potentially trillions of dollars of new ESG assets heating up, we expect to see more issuers enter the ESG ETF market over 2021.”
The recently released 2021 Global Institutional Investor Survey by leading ESG rating provider MSCI found that 73 percent of the respondents said that they were increasing ESG investment as a response to the Covid-19 pandemic, at least to some extent.
MSCI surveyed 200 large asset owners such as pension funds, insurers, sovereign wealth funds, endowments, and foundations with a total of about $18 trillion in assets. Nearly one third of these institutional investors said that climate considerations will have the biggest impact on their investment decisions for the next three to five years. About the same number already regularly look at climate data to manage their portfolio risk.
The survey also found that 77 percent of institutional investors increased ESG investments “significantly” or “moderately” in response to the pandemic. This figure rises to 90 percent when considering the largest institutions, i.e. those with over $200 billion in assets.
“The combination of climate-related events, such as devastating wildfires, floods and droughts, and a global pandemic have accelerated the paradigm shift on ESG and climate change. Once an issue for ‘green funds’ and side-pockets, ESG and climate are now firmly established as high priority issues,” said Baer Pettit, president and chief operating officer at MSCI. “2020 marked a profound shift in the way institutions invest as many investors have recognized that many companies with strong environmental, social and governance practices outperformed during the pandemic.”
The numbers also translate into the impact companies have in their communities. Nearly three out of four respondents said they believe companies with high ESG ratings had good continuity planning during the pandemic.
And while climate is at the center of managing global risk for these investors, 86 percent agreed that “more needs to be done” or “there’s a long way to go” when it comes to organizational diversity. In addition, more investors also want to put increased emphasis on the “S” (social) in ESG.
While 73 percent of survey respondents plan to increase ESG investment either significantly or moderately by the end of 2021, 36 percent see the social aspect as a greater priority by the end of this year as a response to the pandemic.
“In the space of six or 12 months, investors have gone from thinking about ESG as a side issue to thinking about it as completely core to the future of their funds,” noted Roger Urwin, an adviser to MSCI, in the survey. “It is a big shift. And in my career, I haven’t seen a shift quite like it.”