Arguably, one of the most dynamic areas in investing has to be environmental, social, and governance (ESG) investing. Investor interest has surged in ESG, as well as the sheer number of dollars and funds invested in the screening method. But because of its dynamic and ever-changing nature, the style of investing can be hard to pinpoint with respect to trends and industry/investor focus.
Luckily, one of the largest index providers overall—including for ESG—has mapped out some of the biggest trends in ESG for the New Year.
State Street Global’s latest report on ESG shows some major shifts in ESG investor thinking and reinforces some already commonplace beliefs. In the end, these trends could shape the future of the investing style that investors can expect in terms of returns and outcomes.
Be sure to check out our ESG Channel to learn more.
S&P Global’s Latest Missive
S&P is an indexing giant and that size/scope has extended itself toward the world of ESG and socially responsible investing (SRI). Back in 1999, S&P Dow Jones Indices (S&P DJI) launched one of the first indexes—Dow Jones Sustainability World Index—to track the ESG movement. Since then, the firm has expanded upon that and now features a whole series of various ESG-focused benchmarks. And investors have plowed some serious dollars into the firm’s indexes.
With that focus, S&P Global has become an authority on the investing style and has been publishing an annual report on the various trends its analysts see coming in the new year. In its report, S&P highlights that 2021 was a coming out year for ESG and this year will build on that moment. However, there is a bigger focus on accountability and ESG implementation rather than ‘greenwashing’ or using the ESG term to drum up investor interest. With that in mind, S&P has come up with several ideas and trends that investors will most likely be focusing on in 2022.
The Big Five Points
- Bigger Demand for Corporate Credibility: One of the biggest trends that S&P sees in the new year and going forward is focus on corporate leaders and their knowledge and action with regard to ESG. Here, S&P sees that corporate leaders will face “rising pressure to demonstrate that they are adequately equipped to understand and oversee ESG issues.” This not only means talking about ESG issues from climate change to workforce diversity, but actually delivering on those ESG promises. S&P highlights growing shareholder activism—such as the recent vote/ouster of two Exxon (XOM) board members for their stance on climate change—as the basis for the trend continuing.
- Divestment Versus Engagement: This plays into S&P’s next trend: divestment versus engagement when creating ESG portfolios. Historically, ESG has been about excusatory indexing. That is removing firms that are ‘bad’ and focusing on the ‘good.’ However, with many institutional investors, pension funds, and endowments now looking at ESG, the trend has been using their muscle—and share counts—to push toward change at the ‘bad’ firms. The indexer expects this trend to heat up as investors demand more from their portfolios.
- Better Regulations & Reporting Standards: Another tangential reason for continued corporate pressure will be increased reporting standards and regulations on the ESG front. Already, the Biden administration and Department of Labor/SEC have started to examine new rules with regard to ESG reporting standards for funds and corporations. Meanwhile, S&P and its rivals like MSCI and Moody’s have begun to work to take into account a variety of new ESG factors in their ratings and indexes. This will put pressure on corporations to be better with regard to ESG.
- The “S” Gets the Spotlight: One of the biggest trends that S&P sees is a focus on the often forgotten ‘social’ aspect of ESG. The COVID-19 crisis put the crosshairs on various health and safety issues, while diversity and other social capital problems are now in the forefront. Through both corporate and political action, S&P sees investor interest in these areas exploding after being ignored for years.
- Climate Still a Big Deal: Finally, S&P still sees climate change and renewable energy continuing to be a strong talking/investing point for ESG investors. New trends in the sector include moving toward more climate stress testing, a focus on natural capital and biodiversity risks, and making good on net zero pledges. This will drive not only demand for continued renewable energy growth, but also continued investor engagement.
Be sure to check our Portfolio Management Channel to learn more about different portfolio rebalancing strategies.
Investor Action
All in all, S&P Global sees a very robust environment for continued ESG adoption and growth in the new year and expects interest in SRI funds to increase. The biggest takeaway in the firm’s report and analysis is that engagement and holding corporations/government agents responsible will be the biggest shift for the investing style in 2022. Last year laid the groundwork for this, but this year will see an explosion of investors engaging with firms and pushing for changes and meeting of metrics. And thanks to better screening methods, this is all possible.
For investors looking to adopt ESG in their portfolios, this is all great news. This could lead to better returns and overall better index construction when focusing on the style. With that, everyone wins.
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