ESG investing: Past, present and future
A growing number of investors are dedicating their dollars toward funds that have an environmental, social and corporate governance (ESG) focus. But while ESG investing is becoming more popular, it remains mysterious to many. To better understand an ESG approach to investing, it’s worthwhile to review how it began, where it is now and how it’s likely to evolve in the future.
How ESG investing started
The United Nations (UN) was the initial driving force behind ESG investing, although some ESG managers had been investing in an ESG fashion for decades. In 2004, former UN Secretary General Kofi Annan contacted more than 50 CEOs of financial institutions inviting them to join a program that sought to integrate an ESG approach into markets and investing. One year later, the UN produced a report about why ESG investing leads to more stable markets and better societies. From there, the Principles for Responsible Investment (PRI) was launched at the New York Stock Exchange in 2006. The UN backs the PRI, and it remains one of the key entities that provides guidance on ESG investing.
At first, many institutional investors were reluctant to embrace an ESG approach, largely because there wasn’t data to show whether ESG investing did, in fact, have a significant positive impact on societies and markets. There was also a concern that the approach could decrease returns on investments. Because of this initial institutional hesitation, individual investors were also unsure about ESG investing.
Where ESG investing is now
Today, investors have grown to better understand the value of ESG investing and appreciate the opportunity it provides to align personal values with financial success. ESG investing has become particularly popular among millennials and women. Worldwide, there are currently more than $23 trillion USD in ESG investments.
One of the key reasons ESG investing has become more popular is that there is now more data that supports its value. The majority of studies on ESG investing find that the approach provides a net gain. In addition, 90 percent of studies find a “non-negative relationship” – meaning 90 percent of studies say you lose nothing by taking an ESG approach to investing.
ESG in the future
Given millennials have been shown to be drawn to ESG investing, and that they’ll soon begin occupying an increasing proportion of the investor pool, it seems likely that ESG investing is poised to continue growing in popularity. Additional data about ESG investments delivering positive returns will also likely continue attracting attention to, and interest in, the approach. Finally, as investment advisors become more comfortable and familiar with ESG investments, they’ll be better equipped to recommend and connect their clients with ESG-specific funds and products.
It took some time for ESG investing to gain momentum, but now that it’s picked up steam, all signs point to it moving full steam ahead. If ESG investing is something you’re interested in, talk with a financial professional about your options. Taking this approach could afford you both personal and financial peace of mind.
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UMB’s interpretation of ESG factors and the application of this process is subjective and may evolve over time. Each fund held within the ESG portfolio exhibits varying risk and return characteristics due to the potential diversity of securities held within each fund and other criteria outlined in the prospectus. Additionally, due to the screening process for funds held within the ESG portfolio, portfolio holdings will differ from the applicable benchmark and the returns will vary accordingly, either outperforming or underperforming at any time. All investments involve risk, including the possible loss of principal. Past performance is no guarantee of future results.
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