ESG is growing in significance amongst both institutional and retail investors. The practice of ESG investing began in the 1960s as socially responsible investing, with investors excluding stocks or entire industries from their portfolios based on business activities such as tobacco production or involvement in the South African apartheid regime.

Today, ethical considerations and alignment with values remain common motivations of many ESG investors but the field is rapidly growing and evolving, as many investors look to incorporate ESG factors into the investment process alongside traditional financial analysis.(Source: MSCI)

ESG Investing is a term that is often used synonymously with sustainable investing, socially responsible investing, mission-related investing, or screening.  At yourSRI we define it as the consideration of environmental, social and governance factors alongside financial factors in the investment decision-making process.

In recent years, institutional investor adoption of ESG and the subsequent growth in ESG assets under management has accelerated. While much has contributed to this growth, three primary drivers of ESG investment have been identified by our partner MSCI:

The world is changing

Global sustainability challenges such as flood risk and sea level rise, privacy and data security, demographic shifts, and regulatory pressures, are introducing new risk factors for investors that may not have been seen previously. As companies face rising complexity on a global scale, the modern investor may reevaluate traditional investment approaches.

Investors are changing

Over the next two to three decades, the millennial generation could put between $15 trillion and $20 trillion into U.S.-domiciled ESG investments alone, which would roughly double the size of the U.S. equity market. A growing body of studies suggest that millennials - as well as women - are asking more of their investments.

Data Availability

With better data from companies combined with better ESG research and analytics capabilities, we are seeing more systematic, quantitative, objective and financially relevant approaches to ESG key issues. Better data and analytics have paved the way for numerous studies that explore ESG investing.

A common debate with ESG investing revolves around the idea that incorporating ESG factors into the investment process will hurt performance. However, some studies suggest that companies with robust ESG practices displayed a lower cost of capital, lower volatility, and fewer instances of bribery, corruption and fraud over certain time periods.

It may come as no surprise then that numerous academic and investor studies in recent years have found historically lower risk and even outperformance over the medium to long term for portfolios that integrated key ESG factors alongside rigorous financial analysis.

In general, companies with higher ESG ratings were associated with higher profitability, lower tail risk and lower systematic risk.