The Rise of ESG Investing Trends and Sustainable Investing

ESG investing is on the rise, and it's not just a passing trend. According to a report, ESG assets under management grew from $1 trillion in 2014 to $30 trillion in 2020.

As investors become more aware of the impact of their investments on the environment and society, they're seeking out funds that align with their values. This shift is driven in part by growing concerns about climate change and social inequality.

The COVID-19 pandemic has accelerated the adoption of ESG investing, with many investors recognizing the importance of considering environmental, social, and governance factors in their investment decisions. This trend is expected to continue as investors prioritize long-term sustainability over short-term gains.

Nearly 80% of global investors consider a company's reporting on its carbon footprint and commitment to reducing greenhouse gas emissions when making a new investment.

Investors are interested in finding ways to reduce the carbon footprint of their own portfolios, with over 60% likely to purchase carbon offsets if they were available.

The diversity of sustainable investing strategies is set to broaden, driven by demand from Millennial investors and new government incentives and regulations.

Investors are looking for companies to demonstrate how they are proactively planning to protect long-term value, achieve decarbonization strategies, and pivot business models to align with the requirements of climate science.

Here are some key themes that are gaining prominence in ESG investing:

ESG investing is an approach that considers factors beyond risk and return, like climate change, labor management, corporate governance, and many others.

There are many ways to apply ESG investing into your portfolio, including individual stocks, exchange-traded funds (ETFs), mutual funds, and separately managed accounts.

The performance of ESG funds has historically been similar to that of non-ESG funds.

ESG is often used interchangeably with Socially Responsible Investing (SRI), values-based investing, impact investing, and sustainable investing.

ESG investing is an approach that considers factors beyond risk and return, like climate change, labor management, corporate governance, and many others.

The performance of ESG funds has historically been similar to performance of non-ESG funds, which means you don't have to sacrifice returns for your values.

Over 80% of global investors consider a company's reporting on its carbon footprint and commitment to reducing greenhouse gas emissions when making a new investment.

Investors are open to supporting companies with a clear transition plan in place, with 51% considering investing in traditional energy companies as long as they have robust plans to reduce their emissions and address climate change.

More than 60% of investors would be likely to purchase carbon offsets if they were available, which can help reduce the carbon footprint of their own portfolios.

Independent research has shown that ESG investors don't lose on performance when they invest according to their values, with many ESG funds taking a long-term approach and choosing high-quality companies they expect to outperform over time.

At Schwab, you can choose from over 500 mutual funds, over 200 ETFs, and a wide range of separately managed accounts to build your ESG portfolio.

Their proprietary screening and comparison tools make it easy to find and compare ESG funds. You can also view 3rd party ESG stock ratings when researching investments for your portfolio.

Schwab offers a dedicated Financial Consultant who can provide personalized advice and help you learn about managed ESG account options.

The Schwab Ariel ESG ETF is a unique investment option that invests in U.S. companies evaluated based on specific ESG criteria. However, it's different from traditional ETFs, as it won't disclose its holdings daily.

Here are some key differences between the Schwab Ariel ESG ETF and traditional ETFs:

These differences may have both advantages and disadvantages, but they can also improve the fund's performance by keeping its investment strategy secret.

Climate change is a top priority for investors, with 15% ranking it as their top sustainable investing theme. Climate action is a pressing concern that requires immediate attention and action.

Investors are paying close attention to a company's carbon footprint and commitment to reducing greenhouse gas emissions, with nearly 80% considering this factor when making a new investment. This includes investors who are very interested in sustainable investing, with 62% considering traditional energy companies as long as they have a robust plan to reduce emissions.

The net-zero transition will require a change in approaches to land use, with companies needing to reorient their business models and corporate practices to meet global climate targets. This includes ensuring productive and efficient land use, reforestation, and afforestation, as well as biodiversity protection.

Investors are also interested in finding ways to reduce the carbon footprint of their own portfolios, with over 60% likely to purchase carbon offsets if available. This highlights the importance of considering climate change in investment decisions.

Climate scenario analysis offers investors a methodical approach to understand the portfolio impacts of different environmental and economic outcomes. This can help investors make informed decisions and navigate the transition to a low-carbon economy.

Demand for metals and minerals such as copper, lithium, and nickel is set to increase as demand for renewable energy expands, with estimates suggesting a two- to six-fold increase by 2040. This highlights the need for companies to invest in mining exploration and outputs to meet this demand sustainably.

Investors are often hesitant to make sustainable investments due to a lack of transparency and trust in reported ESG data. Greenwashing, or the representation of investments as being more sustainable than they are, is also a major concern.

The appropriateness of an ESG investment or strategy depends on an investor's individual circumstances and objectives. Past performance is not a reliable measure of future results.

To address these concerns, investors can look for companies with robust plans to reduce their emissions and address climate change. Over 60% of investors would be likely to purchase carbon offsets if they were available.

Investor concerns about ESG data and greenwashing are valid, as many investors struggle to find reliable information about a company's sustainability efforts.

Lack of transparency and trust in reported ESG data are major issues, making it difficult for investors to make informed decisions.

Greenwashing, or the representation of investments as being more sustainable than they are, is a significant problem in the ESG space.

A company's corporate responsibility statement and its website can provide valuable insights into its dedication to sustainability.

But be wary of companies that spend more on marketing their green initiatives than on actual sustainability efforts.

Regulations against greenwashing are still lacking, so it's essential to scrutinize a company's disclosures on operations ESG risk and how it's managing those risks.

Investors should look for funds that have clear criteria surrounding what companies they include or exclude in line with their investment mandate.

Ultimately, investors must decide what's important to them and prioritize the E, S, and G issues that matter most.

Sustainable investing is becoming increasingly popular, with 99% of U.S. Millennials expressing interest in it. This demographic is driving demand for sustainable investing, which is expected to broaden into new asset classes and themes in the next 10 years.

Investors are looking for companies to demonstrate how they are proactively planning to protect long-term value, achieve decarbonization strategies, and pivot business models to align with climate science. More than 60% of investors would be likely to purchase carbon offsets if they were available.

To invest sustainably, look for funds that clearly state their investment criteria, such as investing at least 80% of their assets in the type of securities related to their name. For individual companies, gauge their dedication to sustainability by reading the corporate responsibility statement and finding out whether they spend their money on research or operations.

ESG investing doesn't have to mean sacrificing performance. Independent research has shown that ESG investors don't lose on performance when they invest according to their values. Many ESG funds take a long-term approach and choose high-quality companies they expect to outperform over time.

Investors should be wary of greenwashing, where companies spend more on marketing their green initiatives than on actual sustainability efforts. Look for a company's disclosures on operations ESG risk and how it's managing those risks. An e-commerce company may have low carbon emissions, but check how they manage energy consumption, customer privacy policies, and product design and lifecycles.

Here are some key sustainable investing themes to consider:

Independent research from firms like Morningstar has shown that ESG investors don't lose on performance when they invest according to their values.

Many ESG funds take a long-term approach and choose high-quality companies they expect to outperform over time.

ESG funds trailed the broader market in the first half of 2022 because they usually are underweight in the fossil fuel energy sector and overweight in technology.

As with any investment, market cycles and holdings play a significant role in determining performance.

This was evident in early 2022, when oil was rallying and technology was falling, causing ESG investments to lag.

Governance is a crucial aspect of ESG investing, and it's essential to understand the parameters within which countries and companies are run. Good governance is vital at both the country and corporate levels.

Countries may work towards the United Nations' 17 Sustainable Development Goals (SDGs) as an example of good governance. This framework provides a clear direction for sustainable development.

Strong governance principles and risk-management practices translate into sustainable long-term investment performance. For instance, an independent board of directors representing diverse views is always recommended.

Investors can consult the OECD's Guidelines for Multinational Enterprises to stay up-to-date with the latest best practices on governance, bribery and corruption, pay, human rights, tax transparency, and employee treatment. These guidelines are a valuable resource for investors.

Many people become aware of governance issues when they go wrong, such as banks taking excessive risk or companies ignoring harassment allegations. This highlights the importance of vigilance in governance.

As more pension money is invested in less developed markets, investors must be prepared to navigate complex governance standards.

Sustainability and Net Zero is a top priority for companies and investors over the next 10 years, requiring collaboration to finance the transition and consider complex environmental and social issues.

Companies and investors understand that making the global economy more sustainable and inclusive will be a priority in the next 10 years.

All stakeholders will need to work together to find ways to finance the transition in a manner that considers the complex interdependencies of many key environmental and social issues.

Voting can drive positive change and improve the performance of investments by influencing business practices.

Decarbonisation is a key goal, and infrastructure debt can be a catalyst for achieving net zero in the UK and Europe, tapping into long-term investment potential.

To achieve a sustainable and financially sound future, stakeholders must come together to overcome obstacles and identify areas of progress.