What will ESG investing look like in 2021 and beyond? How has the 2020 pandemic affected the development of ESG investing? How can we make sure that we rebuild our economies and societies on stronger foundations? And how can we achieve stability and sustainability in the investment community? To answer these questions, we spoke with 25 industry experts who shared their insights on upcoming ESG investing trends in the Refinitiv 2021 ESG Playbook.
- In the aftermath of the COVID-19 crisis, investors will increasingly consider ESG factors in an attempt to plug the gaps created by the pandemic.
- The Social element of ESG will move to the forefront, while the green bond market will continue to grow as climate change remains top-of-mind.
- 2021 will see the emergence of new technologies, new approaches, and new players, as well as a renewed focus on ESG integration driven by data.
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COVID-19 turned the world inside out in less than a year. The global crisis has had an undeniable impact on ESG investing. In fact, U.S. assets under management (AUM) that mandate ESG factors rose by roughly $5 trillion in just two years.
1. The COVID-19 crisis will reinforce the importance of ESG
Even though nothing objectively good has come out of the COVID-19 crisis, the pandemic has exposed the shortcomings of our economies and societal systems. This will, hopefully, lead to positive change.
- 2020 saw record inflows into ESG funds, and this trend will only keep growing.
- The next few decades will see the largest generational wealth transfer in history: an estimated USD 30 trillion from baby boomers to millennials. This will mark an important milestone for ESG investing. “Millennials filter through a sense of responsibility to concentrate on value-based investments”, said Helene.
Furthermore, in 2021, new labels and standards will catalyse the emergence of various sustainable asset classes.
“In 2021, given rising interests from investors, the industry will see more development of ESG/sustainable labels to channel investments into assets with high ESG value”, said Christian Deseglise, Head of Sustainable Finance and Investments, Global Banking and Markets at HSBC.
In order for us to reap the benefits of this shift, infrastructure must be designed, built, and operated in a sustainable way.
2. “S” will move to the forefront
The Social element in ESG will move to the forefront as the pandemic continues to reveal the weak points of our societies and highlight the need for social responsibility towards local communities.
- The COVID-19 crisis will have a sustained and profound impact on corporate social responsibility practices.
- Investors will only consider companies who manage to maintain a humane approach and put their employees first as sustainable long-term investments.
“How companies manage their relationships with their workforces, the societies in which they operate, and the political environment after the COVID-19 pandemic, will determine their long-term survival, livelihood, and investability”, said Svetlana Borovkova, Head of Quantitative Modelling at Probability & Partners.
Get more insights on how to measure the “S” and “G” in ESG:
3. Transparency and ESG integration will become more profound and data will play a key role
Transparency will be a key element to the evolution of ESG investing in 2021.
Furthermore, transparency will be a key ingredient in sustaining organisational values, and will serve as a management method to build a resilient culture.
“The move to clear performance indicators will be imperative as the new decade begins”, said Alessia Falsarone First Mover Fellow, Aspen Institute Business and Society Program.
She continued: “The questions to consider are:
- How will organisations back risk mitigation claims in the spirit of transparency and help establish new corporate practices to support it?
- Which measures will investors use?
- And how will they strike a balance between reputational risk and ethical behaviour?”
Hand-in-hand with transparency, ESG integration will take centre stage.
“For ESG initiatives to generate value, they will need to be integrated throughout both the enterprise risk management system and business strategy to capture material risks and opportunities”, said Andrew Droste, ESG Board Advisory Specialist at Russell Reynolds Associates.
The basis of both transparency and ESG integration is better ESG data.
“2021 will be a watershed year in terms of data availability and consistency. And this will drive real-world change”, said Sudhir Roc-Sennett, Head of Thought Leadership and ESG, Vontobel Asset Management. “The most striking example of a country that has begun leveraging data to drive change is none other than China.”
4. New concepts and technologies will emerge
Parallel to the rising importance of data, new technologies will emerge to support investors in making the right decisions.
Climate change is our most critical systemic challenge. And we need new tools to build investment strategies that reflect climate risk.
- We are already seeing signs of a large-scale repricing on the horizon.
- We will see a revaluation of municipal bonds and house prices in high climate risk areas.
- There will be an impact on equities and corporate bonds.
According to Dr Matthew McCarten, Spatial Finance Lead, Smith School of Enterprise and the Environment at the University of Oxford, analysing asset-level data will play a crucial role in understanding environmental and sustainability-related risks.
Dr McCarten said: “The top-down approaches often used to assess environmental and sustainability-related risks are overly simplistic.”
Instead, we should take a bottom-up approach.
He added: “Thanks to advancements in technology, it is now possible to produce universally trusted, transparent and verifiable datasets of every asset in the global economy.”
Furthermore, there will be a growing demand for alternative data, such as spatial data acquired from satellites, to drive ESG investment decisions.
The utilisation of geospatial data increases transparency within the financial system, allowing us to better manage ESG-related risks.
Read more about using spatial finance for sustainable development.
5. The sustainability bond market will continue to grow and climate risk will be top-of-mind
2021 will be the year of green bonds. Global green bond supply is predicted to jump 50 percent in 2021 – and it still may not be enough to satisfy investor demand.
Simultaneously, we are seeing examples of ‘greeniums’ that are motivating issuers to go green, further fuelling this ESG investing trend.
Learn more about measuring Green bond premiums in our latest podcast episode:
As climate risk continues to loom over the world, investors will need to find new and better ways to measure it. One method of doing so is to use transition risk models.
According to Paul Ellis of Paul Ellis Consulting and The Sustainable Finance Podcast, current investment strategies are built on linear models that don’t consider the non-financial impacts of climate change and other ESG issues.
“It’s time for advisors to include forward-looking periodic modelling of the potential outcomes of future physical shocks to the financial system as part of their long-term investment strategies”, he said.
Yet, climate is not the only focus for 2021. According to the Refinitiv Sustainable Finance Review, social bond issuance accounted for 30 percent of the sustainable finance bond market during 2020, compared with 5 percent during the whole of 2019.
6. New areas of focus will emerge
As the world emerges from an unprecedented economic and social crisis, it’s inevitable that our focus will shift to new areas that were previously kept on the back burner, if not completely ignored.
The COVID-19 pandemic has shone the light on myriad social issues, including the systemic racial injustices that permeate our systems, for example, unequal access to healthcare.
In 2021 and beyond, investors will explore opportunities to invest in equitable and resilient communities. They’ll do this through a diversified asset allocation targeting risk-adjusted market-rate returns.
Another example of an area that will receive increased attention in the near future is urban development. This is an issue that’s aligned with one of the UN’s Sustainable Development Goals, SDG 11 (Sustainable Cities and Communities).
“As the shortcomings of an increasingly urbanised and unequal world have been laid bare by the Coronavirus pandemic, the need to embrace a circular economy has only grown”, said Curtis S. Chin. “An economic system that integrates the continual use of resources and eliminates waste will be required if long-term sustainability and resilience is to be established.”
Investors will drive a growing demand for resilient and renewable energy sources, next to greener and more sustainable transport networks and buildings.
Finally, biodiversity will start to get more attention, as its loss continues to have serious implications for our livelihoods and economies.
“Biodiversity loss has become a material issue for the private sector. Indeed, business dependencies and impacts on biodiversity generate significant risks and opportunities for companies in all industries”, said Dr Joël Houdet, Director of the Biodiversity Footprint Company
For a more detailed look at the top ESG investing trends in 2021, download Refinitiv’s 2021 ESG Playbook.
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