Is ESG the future of investing?

Also known as Socially Responsible Investing or Impact Investing

ESG investing is becoming a bigger concern outside of Wall Street boardrooms. 87 percent of millennials and 64 percent of women agree that ESG plays an important role in their investment decisions.

There are three groups that show up as being most interested in ESG. It’s millennials, women, and high net worth individuals. So essentially, millennials are the folks that are going to inherit and generate wealth over the next couple of decades. Women are increasingly heads of households and are making investment decisions for their households. And then high net worth individuals are the folks that control the largest proportion of assets today. So just millennials alone stand to inherit or create wealth in the U.S. of about 80 trillion dollars over the next couple of decades. You just took that and you took a quarter of it, a fairly conservative allocation, 20 trillion dollars is effectively the size of the S&P 500 today. And that’s a proportion of assets that could potentially flow into ESG and impact investing over the next couple of decades.

The recent calls for further transparency from companies on their diversity inclusion efforts have reinvigorated interest from the everyday consumer.

If you have a consumer company that sells primarily to women, but the board of directors is dominated by men, there’s a disconnect between the management team and the decisions being made at the top versus who’s actually buying the products. And this has actually been a very strong signal of weaker return on equity for companies that have a lack of diversity in their management and board of directors.

Similarly, for social aspects like employee satisfaction, if you have a company within a competitive landscape, your number one asset is your skilled workforce. If your workforce is dissatisfied and likely to leave and go to a competitor, that’s a risk to your bottom line and to your existential characteristics in the marketplace.

What next for ESG?

The disconnect between Wall Street and Main Street has grown starker, especially with the global pandemic and demonstrations over racial injustice rocking America. As millions lost their jobs and thousands took to the streets in protest, the stock market surged. But there’s one silver lining. ESG investing is also set to surge in 2020.

While the market was quite volatile, what was very interesting is that investors were really flocking to ESG strategies. As early as six months ago, the focus was squarely on the ‘E’, right, and specifically on climate change and the investment implications of climate change. What has happened in the last six months because of the Covid-19 crisis and because of the issues around racial inequality in the U.S. and the ensuing global protests that have evolved, there’s been a big focus on ‘S’ and social issues as it relates to labor, as it relates to employee safety, as it relates to the supply chain. A whole host of issues that were, I would say, not as much of a focus are absolutely front and center.

I would expect that ESG would be a standard option as opposed to one that you need to ask for, you know, if your clients of a mutual fund or a wealth management organization.

And the second element is full transparency on the ESG characteristics of funds so that as an investor, you feel comfortable that you know what you’re buying in terms of ESG characteristics.

In 10 years, this will probably be much more embedded in the investment process. ESG investing won’t be some carve out of the investment panoply, but every investor in the world will be armed with these new tools and these new data sets that will help them to make more informed investment decisions.

Random musings on Finance, Technology, Media, AI, and Venture Capital.