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ESG: Why now 'is probably one of the most interesting times to be looking at this area'

·Assistant Editor
·3-min read

Investment into funds with low environmental, social, and governance (ESG) risk has taken off amid the COVID-19 pandemic.

What's compelling investors is not just stakeholder interests or the need to address the climate crisis but competitive returns.

“Having invested in renewable energy... at least since the late '80s, this is probably one of the most interesting times to be looking at this area,” Afsaneh Mashayekhi Beschloss, the founder and CEO of the Rock Creek Group and former treasurer and chief investment officer at the World Bank, said on Yahoo Finance Live (video above).

Bar and line chart showing an increase in sustainable funds assets in 2019 and 2020.
Sustainable funds' annual assets rose dramatically in 2020. (Source: Morningstar)

Interest in ESG investing has waxed and waned in years past, Beschloss explained. At universities and foundations, “you would have people on the scientific side who were talking about climate change. On the endowment side, you did not have necessarily the same conversations until recently.”

That said, this trend seems different.

“What has changed — and I think COVID expedited it and augmented the speed of change on ESG investing — is if we look in the last 15, 16, 17 months, whether you're talking about education and the intersection of education with technology, whether you're talking about health sector and all the developments in biotech, whether you're looking at affordable housing, and then specifically, of course, on climate change-related investments, these are all areas that have exceeded, in terms of returns, the traditional form of investing.”

'Highest return potential' in ESG

In 2020, the overall number of open-end funds and exchange-traded funds (ETFs) increased by 30% in the U.S. and attracted $51.1 billion in net flows (more than double the record set in 2019), according to a Morningstar report

The report also found that funds that put ESG concerns at the center of the investment process outperformed their conventional peers in 2020. Likewise, the Morgan Stanley Institute for Sustainable Investing found that between January and June of 2020, when the S&P 500 hit its pandemic bottom, sustainable equity funds outperformed peers by a median return of 4.3%, and sustainable bond funds outperformed them by a median return of 0.9%.

"Ghost Forest" an art installation designed by artist Maya Lin is seen in Madison Square Park in the Manhattan borough of New York City May 10, 2021. REUTERS/Brendan McDermid
"Ghost Forest" an art installation designed by artist Maya Lin is seen in Madison Square Park in the Manhattan borough of New York City May 10, 2021. REUTERS/Brendan McDermid

However, measuring ESG returns can be a fraught business as there are currently no uniform standards, definitions, or disclosure requirements that companies must adhere to when reporting environmental impacts in the United States. This can make comparing ESG ratings across sectors and asset classes a challenge for investors.

But that hasn't discouraged investors from taking an ESG approach. 

“Whether you're investing just in ETFs or you're investing in private investment, the returns, across the board, on many ESG areas have been equally competitive, if not exceeding traditional investments,” Beschloss said, adding: “That's why your endowments and foundations are now not listening just to the scientists, but also looking at the highest return potential and much more interested in these areas.”

ESG funds, especially equity funds, outperformed in 2020. (Source: Morningstar)
ESG funds, especially equity funds, outperformed in 2020. (Source: Morningstar)

She also highlighted comments that Britt Harris, who is CEO of The University of Texas/Texas A&M Investment Company (UTIMCO), made at a recent climate summit hosted by RockCreek as evidence of the sea change in interest in climate-related investing, particularly in the energy sector.

At the summit, Harris said that the 40-year era focusing on hydrocarbons had come to a close and that the era of renewable energy is taking hold.

“When you hear that,” Beschloss said, “you realize that the impetus for investing across renewable energy, whether you're looking at solar, wind, whether you're looking at other forms of energy efficiency and technology that will improve our use of energy, it is becoming much more mainstream today.”

Grace is an assistant editor for Yahoo Finance and a UX writer for Yahoo products.

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