The Rise of Environmental, Social and Governance (ESG) Investing in 2021

• Investors have piled USD 54 billion into ESG bonds during 2021.
• Morning Star Morningstar CIO Dan Kemp speaks of the dangers investors face when creating ESG portfolios without considering the nuances.
• Samsung sees a rise in carbon emissions, undermining sustainability claims.
• AIG released its first ESG report and says it cannot rely on purely green technology.
• Architas say that governance is most important within ESG.

ESG (environmental, social and governance) investing has seen a rapid rise during 2021, as more businesses embark on the quest for sustainability. According to the Financial Times, investors have placed over USD 54 billion worth of funds into ESG bonds during the first five months of 2021.

The popularity of ESG investing continues to grow despite rising accusations of ‘greenwashing’ where companies provide misleading information to investors to make their products sound more environmentally friendly. As a result, fund managers are reportedly finding it increasingly difficult to prove their ESG credentials.

Data collated by Morningstar reveals that greater focus is being placed on fixed income funds following a history of ESG focused equity products. As a result, ESG investing hit the significant USD 54 billion mark at the end of May 2021; by comparison, ESG bond funds for the whole of 2020 stood at USD 68 billion. The Morningstar data covers open-ended funds and exchange-traded funds globally.

Assets under management in the ESG products surged 14% to USD 374 billion during January and May 2021 and have nearly tripled over three years. In 2020, ESG assets rose by a substantial 66%, whilst there was just a 12% rise in all fixed-income fund assets for the year.

The rapid rise in demand for ESG funds has led to a burst of new eco-friendly funds and product launches, including the UK government’s recent green savings bonds announcement.

BloombergNEF highlighted that USD 245.3 billion worth of green bonds has been issued so far during 2021, USD 83.8 billion in sustainability bonds and an additional USD 129.2 billion in social bonds. In comparison, the five months to May 2020 saw USD 91.44 billion worth of green bonds issued, USD 15.21 billion in sustainability bonds and USD 27.87 billion in social bonds.

Jose Garcia-Zarate, associate director at Morningstar, highlighted that ESG demand is particularly prominent across Europe. However, certain fund managers are finding it challenging to apply ESG ethics to particular bond markets, even green government bonds.

Other countries experiencing a rise in ESG demand include the US, which saw USD 4.75 billion worth of ESG bond fund sales during the first half of 2021 compared to just USD 5.92 billion for all of 2020. In addition, USD 17 billion has also been invested into passively managed ESG bond funds so far this year, compared to USD 15.6 billion during 2020.

Morningstar’s data also highlights that 122 new ESG bond funds were launched during 2020, with 44 new funds added during Q1 of 2021.

Morning Star CIO says investors must understand the nuances of ESG investing

Morningstar CIO Dan Kemp recently stated during the Sustainable Investment Festival that investors must understand the nuances of ESG investing to avoid facing dangerous risks. Mr Kemp noted that ESG was an omnibus term and that investors should distinguish between the various levels before constructing a portfolio.

Mr Kemp highlighted that ESG investing could be broken down into two levels; ESG risk reduction and value preferences, and noted that it is essential for the two sides to be separated. Although many believe ESG investing comes down to relevant fund selection, the CIO stated that this was just one aspect of the process.

ESG investing means that the investor’s values are directly linked to the funds selected. Therefore, the changing economic characteristics of the different themes must be accounted for. For example, ESG ETF and the benchmark sector have varying weightings, such as energy and healthcare, leading to a difference in outcomes.

As a result, Mr Kemp recommended that those looking to build an ESG portfolio appoint a discretionary fund manager (DFM) to ensure that the asset class model reflects where the funds are invested. For example, many ESG investors will exclude government bonds from their portfolios as securities are often used to finance functions such as nuclear power and defence investment. However, governments also fund integral aspects of society such as healthcare, social care, education and criminal justice.

Whilst Morningstar encourages clients to include government bonds in their portfolios, Mr Kemp highlighted the importance of having conversations with clients to educate and inform them to help them make a personal decision.

Governance is the most integral part of ESG, says Architas

According to the investment firm, Architas, governance is the essential aspect of ESG investing. The firm conducted a global study on ESG investing and found that 10 out of the 11 global markets surveyed stated that honest and transparent accountancy ranked as a number one factor.

Cyber-security and data protection followed closely as crucial elements of ESG investing, with 8 out of 11 global markets ranking them highly.

The report stated that strong governance was a natural priority, with all investors requiring a foundation of trust when dealing with money.

It was also identified that financial services must do more to thoroughly understand clients’ needs within ESG investing by having more in-depth conversations, so their requirements are reflected within their portfolios.

Architas’ research revealed that 26% of clients in both Europe and Asia stated that they did not have any discussions with their financial adviser regarding ESG or responsible investments.

The report discovered that 34% of clients in Europe and 46% in Asia who do not currently hold an ESG investment stated that they likely would in the future.

Matthieu André, chief executive of Architas, stated that ESG financing would be crucial to global economic recovery from COVID-19, with all major economies having net-zero emissions targets in place.

Samsung’s rising carbon emissions undermine sustainability claims

Businesses today are under intense scrutiny when it comes to climate change and sustainability. For example, tech giants Samsung are currently the subject of criticism as reports indicate the company is seeing increased carbon emissions despite their sustainability claims.

Youn Sejong, director of Solutions for Our Climate, highlighted that whilst many companies are showcasing their ESG initiatives, very few are making tangible changes to help the environment.

Samsung reported that their greenhouse gas emissions rose by 5% in 2020 compared to the previous year. Greenpeace also says the company also depends on fossil fuels for more than 80% of its electricity.

The discovery is alarming, given that Samsung has claimed only to use renewable energy across their US, European and Chinese sites, instigating questions over their sustainability efforts. Samsung, however, has declined to comment on the matter.

Samsung is known for its manufacturing bases in Hanoi and Seoul, both of which are reliant on coal. Although the company is keen to transition away from coal, no timeframe has currently been set. However, in countries such as Mexico and Brazil, Samsung has aimed to use 100% renewable energy by 2025.

Environmental activists have stated  Samsung should place increased pressure on South Korean and Vietnamese governments, given that they are the largest employer and biggest contributor to GDP (gross domestic product) within these countries.

Samsung’s affiliate companies such as Hyundai, Kepco have also come under fire for their reliance on coal, further undermining their climate change claims.

AIG say they cannot purely rely on green technology

American International Group (AIG) recently released its first-ever ESG Report, outlining how the company will take steps to a more sustainable future. The report stated that climate change was a complex issue, and an environmental revolution could not take place purely through reliance on green technology.

AIG confirmed their commitment to climate change but also stated they would continue to promote diversified energy portfolios, such as renewable and lower-carbon energy producers, as well as fossil fuel users. The company does not believe it is in the best interests of stakeholders to cut ties with firms that are yet to transition to complete sustainability.

The report also illustrates AIG’s expansion into the renewable energy market and how they provide risk solutions for clients looking to reposition their portfolios. In addition, the company is in the process of creating an energy transition project, fusing company resources to better serve its energy clients in their quest towards a low-carbon economy.