The Importance of ESG Investments in Numbers
The global financial landscape is undergoing a remarkable transformation as sustainable investments gain traction. In 2022, assets classified as sustainable reached almost 25% of the entire market.
Regulation has become a crucial focal point as sustainable assets gain prominence. To prevent misleading practices, regulators are vigilant about "greenwashing," and guidelines have emerged to encourage transparency in ESG disclosures.
Furthermore, the growing concern for environmental, social, and governance issues is not just a trend, but a palpable shift in mindset among investors. Customer demand, societal benefit, and the pursuit of market trends are emerging as key motivations, demonstrating that ESG investments are not merely a financial choice, but a response to global concerns.
This shift is not limited to traditional financial management. Investors and alternative managers are aligning their strategies with ESG criteria, recognizing the relevance of these factors in selecting managers and making investment decisions. The inclusion of themes such as Climate Change and Diversity and Inclusion in management policies highlights not just a trend, but a lasting transformation that is shaping the future of global markets.
In this text, we aim to highlight the importance of ESG from different perspectives: market size, regulation, and investor concern.
Market Size
The sustainable asset market has witnessed remarkable growth. Within the universe of sustainable assets, a diverse range of investments stands out, reflecting the growing commitment to environmental, social, and governance practices. Green bonds, for example, finance projects aimed at environmental sustainability, such as renewable energy and energy efficiency. Socially responsible investment (SRI) funds direct resources to companies with strong performance in ESG criteria, while green bonds provide an opportunity to invest in specific projects with clear environmental benefits. Furthermore, sustainability indices group companies that adopt responsible practices. This ecosystem of sustainable assets not only diversifies investment options but also drives a positive transformation in the financial landscape, aligning economic growth with sustainability principles.
According to the latest report from the Global Sustainable Investment Alliance1, in 2022, assets classified as sustainable exceeded 30 trillion dollars, representing a 33% increase since 2016. Notably, Europe leads with 46% of the total of these assets.
Source: Global Sustainable Investment Review 2022
It is understandable that Europe and the United States hold the majority of these assets, given the size of their markets. When considering the percentage relative to the global market, sustainable assets represent 24.4% of all assets. Regionally, Canada (47%), Australia and New Zealand (43%), Europe (38%), and Japan (34%) stand out. In the United States, the proportion of sustainable assets is still modest, reaching 13%.
Regulation
As the sustainable asset market gains relevance, regulators have also become concerned with the topic, primarily seeking to prevent companies from misleading investors by claiming to have ESG-related policies when, in practice, they do nothing – a practice known as greenwashing. To mitigate these issues, various guidelines have been created that encourage or require companies to disclose information on relevant ESG risks and opportunities. The main ones are related to climate issues, such as the TCFD (Task Force on Climate-Related Financial Disclosures), which uses the Paris Agreement's goal of staying well below 2°C, with the ambition of staying below 1.5°C, attempting to operationalize it for the business world. The four pillars of the TCFD recommendations are:
- Governance: disclose how the organization addresses climate-related issues
- Strategy: disclose the actual and potential impact of climate-related issues on the business
- Risk Management: disclose how the company identifies, assesses, and manages climate-related risks
- Metrics and Targets: disclose the metrics and targets used
Although these are only recommendations, some countries have made these disclosures mandatory, and others are poised to do so.
Additionally, in Europe, a growing regulatory framework aims to increase ESG data disclosure by large investors. An example is the regulation of pension funds in the United Kingdom, which must now disclose how they consider ESG factors in their investment policies, subject to fines if they fail to comply. Furthermore, pension funds with over £1 billion in assets must publish an annual report on climate change.
Investor Concern
In addition to gaining relevance and attracting the attention of authorities, concerns about environmental, social, and governance issues are increasingly prevalent among investors. According to a Deutsche Bank2 survey conducted at the end of 2021:
- 54% integrate ESG factors into their analyses.
- 15% seek companies ranked higher in ESG criteria (best in class)
- 14% exclude sensitive sectors (negative screening)
- 7% make impact investments
- Only 10% of investors have no ESG strategy
Source: Deutsche Bank Research
Another survey, conducted by BNP Paribas3, revealed that 51% of investors use ESG data and factors in their investment decisions, and 42% integrate them into their risk management practices.
The Deutsche Bank survey also highlighted the main motivations for incorporating ESG factors, with client demand being the primary reason cited by 63% of respondents. Additionally, 54% mentioned the benefit to society, while 51% seek to follow market trends.
Source: Deutsche Bank Research
Meanwhile, a survey focused on alternative investments by the European group LGT Capital Partners4 showed that 73% of investors believe ESG is relevant for selecting alternative managers, and 54% are prepared to exclude managers based on ESG issues. In the same survey, 52% of managers have policies to address Climate Change in their investment decisions, while 36% plan to have them within the next 2 years.
Furthermore, 35% of managers consider Diversity and Inclusion in their investment decisions, and 27% plan to include it within the next 2 years.
And it's not just in investment management that ESG themes are taken into consideration. The same LGT Capital Partners survey concluded that 48% of respondents already have a Diversity and Inclusion policy in their firms, and 20% intend to have one within 2 years.
A significant market with growth potential
With over $30 trillion in sustainable assets and a clear shift in mindset, ESG investments are not just a trend, but a revolution. From green bonds to sustainability indices, the diversity of options reflects a comprehensive commitment. Regulations like TCFD signal increasing transparency. As investors integrate ESG factors, the pursuit of profit aligns with social responsibility.
This convergence is particularly notable when observing the growing concern among investors, especially the new generation. We are witnessing the impacts of a lack of attention to this issue on the environment and society. This scenario fosters a virtuous cycle, where the increasing demand for ESG investments drives a broader supply of products and services. Consequently, the market becomes more regulated, providing additional security for new investors to enter.
At Jera, we believe in the growing concern for environmental, social, and governance issues, and we seek to map material risks and opportunities in our investments.
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