7 ESG Essentials Investors Need to Know

7 ESG Essentials Investors Need to Know

By Matt Dallisson, 21/10/2021

From consumers to policy makers, many economic actors are backing sustainability—and creating a powerful portfolio opportunity for investors.

The use of environmental, social, and governance factors (altogether known as ESG) is increasingly informing investment decisions. But although ESG investing has grown in prominence in a few short years, there’s a disconnect:

To properly capitalize on this trend, it’s important to first fully understand it.

According to J.P. Morgan Asset Management, here are seven essentials that can help investors understand the growing importance of ESG investing.

1. ESG considerations are affecting consumer preferences and attitudes.

The public is paying attention to how companies position themselves, to ensure their purchases will be sustainable.

In a survey, respondents around the world were asked whether they agree with the question, “I buy from companies that are conscious of protecting the environment.”

Here are the trends that emerged:

Country Agree Disagree
🇨🇳 China 71% 3%
🇮🇩 Indonesia 61% 3%
🇸🇬 Singapore 52% 9%
🇺🇸 U.S. 51% 15%
🇰🇷 Korea 48% 17%
🇩🇪 Germany 47% 11%
🇦🇺 Australia 47% 15%
🇯🇵 Japan 33% 22%
🇭🇰 Hong Kong 31% 17%

Source: J.P. Morgan Asset Management; PwC June 2021 Global consumer insights pulse survey. Data as of June 30, 2021.

Across markets, consumers in China seem to be the most environmentally inclined, but all countries surveyed exhibited a positive shift towards companies that support environmental protection.

Why it matters: Consumers are making decisions based on ESG considerations, and they’re voting with their wallets. This change has ripple effects, and is shifting from individuals to impacting higher levels, such as governments.

2. Policymakers are setting environmental and social goals.

Governments of the world’s top greenhouse gas (GHG) emitters are working towards a net zero future, in which GHG emissions are reduced or offset.

What is the current trajectory of GHG emissions (measured in tonnes per year of CO₂ equivalents, tCO₂e) and what is the gap we need to bridge in the race to net zero?

Year 🇪🇺 EU (tCO₂e) 🇺🇸 U.S. (tCO₂e) 🇨🇳 China (tCO₂e)
1990 5.7B 6.4B 3.3B
2000 5.2B 7.3B 5.1B
2010 4.8B 7.0B 10.9B
2020 3.7B 5.9B 13.0B
2030P 3.3B 5.9B 13.8B
2040P 1.6B 3.0B 9.2B
2050P 0B 0B 4.6B
2060P 0B 0B 0B

Source: J.P. Morgan Asset Management; Climate Action Tracker. Data as of June 30, 2021.

Why it matters: Altogether, around 60 countries—representing over half of global GHG emissions—have set ambitious net zero emissions targets for the coming decades.

3. For some, the shift to sustainability may be a headwind.

Traditional energy needs to account for a much smaller proportion of the global energy mix, if we are to achieve the goal of net zero emissions by 2050.

Here’s what each energy source needs to contribute in terms of their share (%) of the primary energy mix, compared to past trends:

Year Oil Coal Gas Renewables Nuclear
and Hydro
1970 46.9% 30.0% 16.9% 0.2% 6.1%
1980 45.8% 26.9% 18.3% 0.2% 8.7%
1990 39.7% 27.2% 20.5% 0.5% 12.2%
2000 39.2% 25.0% 21.9% 0.7% 13.3%
2010 34.2% 29.9% 22.5% 1.9% 11.5%
2030P 26.9% 17.0% 22.2% 20.9% 12.9%
2040P 15.4% 5.5% 15.9% 47.5% 15.7%
2050P 6.8% 1.9% 13.0% 59.2% 19.0%

Source: J.P. Morgan Asset Management; BP Energy Outlook 2020. Forecast is based on BP’s scenario for global net zero emissions by 2050. Data as of June 30, 2021.

Why it matters: The shift to renewable energy may pose a challenge for industries reliant on fossil fuels. Fortunately, it’s not too late for companies to transition.

4. ESG creates opportunities for those at the forefront of change.

Looking at the movement of global investment, billions of dollars are flowing into the energy transition.

Year Renewable energy Storage, electrification,
carbon capture, other
Total Amount
2004 $33B $0B $33B
2008 $157B $25B $182B
2012 $239B $24B $263B
2016 $277B $101B $378B
2020 $304B $197B $501B

Source: J.P. Morgan Asset Management; Bloomberg NEF, BP Statistical, Eurostat, Lazard, METI. Storage, electrification, other includes hydrogen, carbon capture and storage, energy storage, electrified transport and electrified heat. Data as of June 30, 2021.

Why it matters: With interest expanding quickly, this provides a unique opportunity to tap into the nascent ESG market.

5. ESG covers more than climate—Social and Governance is growing too.

As the name suggests, ESG is all-encompassing, with a scope that goes far beyond the environment.

MSCI analyzed the corporate mentions of diversity and inclusion in earnings calls (four-quarter moving average for MSCI ACWI companies)—and found that they have almost doubled in the past two years.

Why it matters: This signals rising interest in the varied criteria that make up ESG investing.

6. ESG is affecting the investment landscape.

The demand for sustainable fixed income strategies is also growing rapidly, with global sustainable bond issuance growing over 25x between 2016-2020:

Type of Bond Issuance 2012 2016 2020
Green $4B $84B $291B
Sustainable $1B $7B $176B
Social $1B $3B $237B

Source: J.P. Morgan Asset Management; Climate Bonds Initiative. Data as of 30 June 2021.

Why it matters: Growth and demand is high, and sustainable investing is not limited to equities—environmental and social projects have increasing access to financing.

7. ESG is changing the nature of investment flows.

Looking at the big picture, here’s what proportion of each country’s assets into sustainable strategies has evolved around the world:

Region/ Country 2016 2017 2018 2019 2020
🇪🇺 EU 5% 8% 18% 27% 48%
🇺🇸 U.S. 1% 0% 1% 4% 22%
🌏 APAC -1% -1% 0% 2% 6%

J.P. Morgan Asset Management, Morningstar. Data as of 30 June 2021.

Why it matters: Although certain regions are leading the way, overall demand for sustainable funds is expected to continue on this upward trend.

As these seven ESG essentials make clear, sustainable investing is becoming a compelling vehicle for change worldwide. But incorporating ESG criteria into investing is as much about doing well financially, as it is about doing good.


This content was originally published here.