What is ESG? Why is it important and why is it gaining so much momentum?
ESG type funds will bring $15-$20 trillion of asset inflows over the next 2-3 decades. THAT IS THE SIZE OF THE ENTIRE S&P 500 TODAY!
What is ESG?
ESG investing is a term that is synonymous with sustainable investing and impact investing. It stands for Environmental, Social and Governance (ESG) factors. It looks beyond a company’s valuation & profits but also what steps their taking to improve the connection between humanity and nature. How are they helping with climate change, how are they interacting with their employees and communities, and does the company run itself responsibly? These are types of questions that are considered into the ESG metric.
Why is it important?
The world is moving at its fastest pace ever in human history. It’s happening while we transition from a shareholder capitalistic world (companies focusing on maximizing profits regardless of the negative effects towards humanity/nature) to a stakeholder capitalism; in which companies are thinking about factors and attributes bettering society as a whole. Now, don’t get me wrong, shareholder capitalism has done a lot of extraordinary things the past 2-3 centuries. It has been a powerful engine for good, it has lifted 1 billion people out of poverty since 1990, it has increased productivity tremendously both domestically and globally. However, it has come with a big cost. It has contributed towards the danger effects of climate change; it has damaged equality and the health/wellness to humans and animals.
It is important now, more than ever, for individuals to recognize how special it is to be alive during this time in history and why this generation is best positioned to come together and make a positive impact towards a better tomorrow before there’s no turning back.
Listed below are the reasons why Millennials/GenZ’s have leverage during this generation:
- The US economy is driven by 70% consumerism.
- The largest cohort in human history belongs to Millennials (1981 – 1996) and GenZ’s (1997 – 2012) with close to 50% of the US population. 50%!!! And what do the majority of this group care about? They care about the environment, they care about a good education, they care about their health and well-being. They care about making a positive impact on the world.
- With millennials/genz’s accounting for nearly half of the US population along with their high purchasing power AND representing a huge percentage in GDP through consumerism; this gives them leverage. The leverage to practice ethical consumerism and focus on sustainable investing to improve the harmonious connection between humanity and nature. Companies need to listen to what matters to consumers because if they don’t, the largest cohort in history can collectively get together and refuse to buy any goods/services which will force the company to go out of business. That’s the power they have. Good news is, companies are listening. In 2019, 90% of S&P 500 companies issued a sustainability/responsibility report. Transparency is still improving across all sectors in the market.
- Today’s time is different than it was 20-30 years ago. S&P 500 intangible assets (Intellectual property, brand recognition, patents, copyrights, etc..) were less than 10% of their book value. Now, it’s more than 70%! Which means REPUTATION of these companies weigh extremely heavily and are far more difficult to value than tangible assets such as equipment, inventory, land, etc… In other words, the reputation and existence of these companies depend on how they do business for decades to come by meeting ESG standards.
Why is gaining momentum?
Putting things in perspective…
Sustainable funds attracted around $5 billion in 2018, which held the record at the moment. In 2019, sustainable funds pulled in roughly $20.6 billion in net new money, 4 times the amount the previous year! In the first quarter alone in 2020, it already attracted more than half of the $20.6 billion from the year before.
So is this a trend or is it going to continue…
Lets assume that the USA’s wealth grows roughly $4trillion every 10 years which is in line with historical trends. Then you have the transfer of wealth from baby boomers (1946 – 1964) to millennials (1981 – 1996) that’s going to kick in late 2020’s that roughly equates to $30-40 trillion of financial and non financial assets. $30-40 TRILLION DOLLARS!!!
Also, there was a survey done in which 80% of Millennials either own or are thinking about investing into ESG types of vehicles. Now, lets assume that a conservative 30-40% of their wealth is invested in equity ESG funds, this would equate to $15-$20 trillion of asset inflows over the next 2-3 decades. THAT IS THE SIZE OF THE ENTIRE S&P5O0 TODAY!
Not only, there’s a HUGE wave of money poised to flow into these types of strategies but it’s also a great way to REDUCE RISK.
15 out of 17 (90%) of bankruptcies in the S&P 500 between 2005-15 could have been avoided by screening out companies with below average ESG scores. 90%!!!
ESG is too important to ignore. The cost of not taking any action is dangerous. We are extremely blessed to be alive during this time in human history and we as a generation, have the opportunity to make a difference in how the world is going to shape for our kids and their kids. It is up to us. It’s time to ACT.
One other thing. Be aware of your budget. The single most important factor about budgeting is it reveals inefficient spending patterns. We all have them, you’re not alone. It is important to understand what they are and use that money towards ESG investing. Invest for your future and the future of the well being of our home, planet Earth.
“Individually, we are one drop. Together, we are an ocean.”– Ryunosuke Satoro