A seismic shift has taken place over recent years with the rise of environmental, social, and governance (ESG) investing.
Investors can opt to concentrate on one ESG element, such as social responsibility, or incorporate all three into their decision-making.
ESG is even now considered an investment 'factor' that professionals use to benchmark and weight portfolios against – not unlike value or growth factors.
The ESG sector has underperformed so far in 2022. However, this isn't surprising given the enormous rally that commodities have staged, as seen below.
New ESG trends emerging
Gone are the days when the mantra of 'creating shareholder value' was front and centre of public companies' earnings transcripts.
The public – not just investors – are starting to hold ASX companies and even entire industries accountable for ESG.
This has resulted in the formation of a novel and widening market that is presenting more and more opportunities. That's the expert opinion of Anthony Miller, chief executive of Westpac Institutional Bank.
Westpac economists conducted a survey in 2019, and again this year, to assess the state of the ESG market.
"Our new research, which expands on the approach in 2019, reveals a market that has grown not just in size, but in diversity and sophistication," Miller wrote in a Westpac report titled Financing for sustainability: Asia Pacific's evolving ESG market.
"The majority of investors and issuers in the region are taking climate matters into their own hands and are actively pursuing the decarbonisation of their businesses and portfolios through sustainable finance."
Other findings in the new survey also show a behavioural shift in sustainable financing for both investors and issuers.
"A sustainable approach to business has become a core corporate requirement," Miller added. He noted that ASX investors are becoming increasingly aware of the impacts of climate risks and litigation on their assets.
Assets under management (AUM) designated to ESG themes has also spiked considerably. About 66% of investors now hold more than 25% of their AUM in sustainable investments, the Westpac study finds.
Not only that, but 50% of investors anticipate allocating the majority of their net worth to sustainable investments by 2025.
But what are the benefits?
Perhaps the biggest benefits to ESG investing is the mitigation of climate risk and proper diversification, Miller says.
"That main driver is now improved management of ESG risk (24% of respondents), although investing for sustainability or impact outcomes continued to rank second (23%) and remains a strong motivator."
The greater diversity of products has ensured more sophisticated investors are participating in the ESG segment. The presence of "non-financial benefits" is starting to weigh heavily, too.
Westpac's institutional boss explains:
Among investors, the reputational and financial benefits they derive from sustainable investments are a significant driver of demand.
Over three quarters (77%) agree or strongly agree that their sustainable investments have performed better financially than equivalent traditional investments, and 83% agree or strongly agree that their sustainable investments have had a greater positive impact on their organisation's reputation than traditional investments.
Quite importantly, Miller notes that both investors and issuers say ESG investing has been beneficial to them.
That's all fine and dandy, but someone has to bear the costs, seeing as the two parties are on opposite sides of the transaction. Just who that is, Miller doesn't speculate.
Westpac Banking Corporation (ASX: WBC) shares finished today's session slightly down by 0.04% to $23.68.
