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Sustainability is getting a bigger and bigger topic not only in daily business but also in our personal lives. There are many acronyms like ESG, UNPRI, SDG, and so on. But it is hard to keep a clear view with all these acronyms. This article helps you understand “ESG”.
What Does “ESG” Stand For?
ESG is an acronym of the words environmental, social and governmental. The three ESG factors can be seen as dimensions of sustainability. Sustainability is not only caring for our environment, it is also caring for people and providing fair political and business structures and systems.
Why Are “ESG” Factors Getting More Important?
ESG factors are often used by investors to implement sustainability into their decision-making. Many of them include these factors in their analysis besides the usual fundamentals like credit risk, etc.
Numerous studies have found that strategies that include ESG criteria outperform conventional strategies, especially in times of crises, e.g., the market breakdown in March 2020 related to the Covid-19 pandemic.
What Is The Matter To Include ESG Criteria Into Investment Strategies?
On the one hand, firms want to lead their investments in fields that do not harm their surroundings.
On the other hand, they want investments that can offer long-term profits.
Thirdly, by introducing ESG to your portfolio you can avoid companies with idiosyncratic events like the diesel scandal from VW in 2015, a breach in a dike from Vale in 2019, or the Deepwater Horizon oil spill from BP in 2010. All of these events caused massive price slumps right after the events.
Lastly, regulators are starting to demand taking sustainability into account from regulated investors.
How Many Assets Do Follow ESG Strategies?
The market with ESG related strategies is growing very fast. According to Bloomberg at the end of 2020, there was 37.8 USD (51.3 SGD) (51.3 SGD (51.3 SGD)) trillion invested in these strategies. They calculated a growth pace of approximately 30% per annum.
By just taking half of the growth rate with 15% p.a., Assets under Management related to ESG will exceed 53 USD (71.9 SGD) (71.9 SGD (71.9 SGD)) trillion globally in 2025, which is approx. a third of all assets under management worldwide.
 https://www.bloomberg.com/professional/blog/esg-assets-may-hit-53-trillion-by-2025-a-third-of-global-aum/ (accessed on 23.12.2021)
Writer: Annika Huck
Editor: Evelyn Tobing