In past years, an investor could emphasize or ignore sustainability factors at their discretion, with personal views not market fundamentals driving their choice. But that has been changing rapidly, with sustainability increasingly functioning as a driver of performance and portfolio stability.

According to Morningstar, in Q1 2020, sustainable strategies saw a net inflow of US$45.6BN, compared to an outflow of US$384.7BN for the overall fund universe amid the COVID-19 pandemic market sell-off. Global sustainably invested assets under management (AUM) reached $40.5T in 2020. That represents roughly 33.8% – 40.5% of the estimated $100T – $120T total global AUM.

ESG factors are material in investment decision-making

This growth in sustainable investment AUM can be attributed to a recognition that while once thought to be non-financial, ESG factors are actually material in investment decision-making. The financial materiality can play out in the following ways:

• Ignoring ESG factors can be an expensive mistake – Investors are realizing, that whether or not they care about the societal or environmental impacts resulting from the companies they invest in, they assume a great deal of additional risk by ignoring these factors.
• Investing for the future – Traditional business factor models need to be evaluated for new risks from the shift to a low carbon economy and more engaged consumers who can boycott and hold firms accountable when they ignore broad social issues.
• Driving change with investments – A smaller, but powerful body of investors are seeing opportunity to achieve so-called double or triple bottom line investing. These are individuals who are making capital available where they believe it will do the most good – and who are closing funding gaps using the demand for environmental and social change to drive profits.

Is there a bubble created by ESG-labeled strategies?

In 2021, the World Economic Forum named extreme weather, climate action failure, and human environmental damage the top 3 risks facing the global economy.

Surveys show that most people now view climate change as a fundamental threat. Savvy companies and investors have accepted the need to address the funding gaps that exist in addressing climate change COVID-19 highlighted the vast inequities faced by different populations, encouraging investors to take up the mantle and be a force for greater good.

In Citi’s view, investors and businesses can improve their image, bottom line and environmental and social impacts with a focus on the major unstoppable trends that are now remaking our global economy.