The Enduring Power of Sustainable Investing

[An update to content originally published on November 06, 2023]

9 reasons why sustainable investing is here to stay

Ever since environmental, social, and governance (ESG) entered industry vernacular in 2006, the term has gained both momentum and scrutiny. Critics label ESG as mere virtue-signaling, debating its financial substance. Many also argue that ESG investing lacks the financial returns to substantiate its value. Despite economic and regulatory uncertainty around ESG, demand for sustainability-driven investment products and businesses tells a different story.

A survey published by the National Retail Federation shows that most US consumers — particularly younger ones — are willing to pay extra for more sustainable products.¹ Institutional investors also allocate trillions of dollars to sustainability-aligned investments across public and private markets. October 2023 research from Capital Group across 25 countries found that 90% of investment professionals had adopted ESG in their investment approach.²

Continued demand and expanding research indicate that ESG is far from a passing trend.

Underpinned by evolving regulatory frameworks for both institutional investors and corporations, as well as a consumer shift toward sustainability, we’re seeing multiple factors that suggest ESG is here to stay:

Reason 1: We’ve reached a critical mass of allocated capital

Investors are not just talking about ESG; they’re putting their money where their values lie.

Based on their scenario analysis, Bloomberg reports that US ESG-related assets under management is set to surpass $40 trillion by 2030, with a projected global AUM of $140 trillion.³ Over $3.0 trillion is estimated in global sustainable funds as of December 2023. This is up from $600 billion in March 2018, implying annualized growth of almost 31%.

The continued capital allocation to exchange-traded funds, mutual funds, and sustainability-aligned businesses reinforces the permanence of ESG.

Reason 2: Policymakers have enacted regulation

Global policymakers have set frameworks to align businesses and investors to tackle global sustainability challenges, with regulators deploying those frameworks in their local markets. Underscoring the growth in global ESG regulation, 2023 research from ESG Book found that regulation increased by 155% over the past decade.⁴

For instance, the European Union’s Sustainable Finance Disclosure Regulation (SFDR) and increased corporate reporting requirements via the Corporate Sustainability Reporting Directive (CSRD) are already in effect today. Prescriptive recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD) also offer a preview of ESG’s increasing importance in regulatory frameworks. The regulatory momentum and requirements around sustainable investing and reporting demonstrate this is not a fleeting trend.

Reason 3: A shift from “ESG” to “sustainability”

As sustainability takes center stage, the industry increasingly favors the term “sustainability” over “ESG.” This linguistic shift represents the industry’s development of a more nuanced understanding of the indicators driving sustainability-aligned finance impact. Investors and companies rely less on abstract scores and more on specific attributes to measure how businesses operate responsibly and ethically.

Reason 4: Asset owners are driving adoption

Asset owners are putting greater pressure on asset managers to provide sustainability solutions. Many asset owners are implementing direct-impact investment strategies in private markets and passive sustainability index-tracking strategies in public markets. That move signals a profound shift toward ESG principles as a long-term investment strategy.

That said, challenges do remain:

• Lack of sustainability-aligned investment products
• Data overload in the public markets
• Data scarcity for private markets

As a result, these “challenges” are often seen as opportunities for innovation and growth in the sector.

Reason 5: Firms are receiving much-needed support

Data-first software-as-a-service (SaaS) and service providers are adding value by integrating powerful datasets, developing sustainability modules, and offering regulatory reporting solutions. These contributions help market participants navigate the operational complexities of ESG implementation, ensure compliance with evolving regulatory standards, and empower firms to incorporate ESG into their decision-making.

Customer demand, regulatory pressure, and the sheer volume of investment flowing into ESG-compliant companies all underscore its staying power. The transition to sustainability appears to be a journey that investors will continue to undertake — for the benefit of both business and society.

Reason 6: Investors seek transparency and trust

Greenwashing scandals and misdirected ESG claims have eroded some investor trust. Investors want detailed, framework-aligned sustainability metrics and evidence of real, measurable impact. Increased corporate engagement from asset managers puts pressure on companies to commit to, measure, and make progress toward sustainability targets.

Reason 7: The need to manage “non-financial” risks

Traditional financial models often overlook systemic risks stemming from factors like environmental disasters, social welfare, and cybersecurity. These risks, once considered edge-case events, now pose ongoing financial threats to businesses and investors. Available data and metrics allow investors to proactively identify and mitigate these ‘non-financial’ factors. Integrating ESG into a comprehensive risk management strategy future-proofs portfolios and protects long-term returns.

Reason 8: Growing interest in private ESG funds

Over a third of institutions surveyed by Natixis say sustainable investments present the biggest opportunity in private markets for 2024.⁵ Many private markets investors are increasingly demanding sustainability-focused portfolios. In turn, private markets managers are raising capital to generate positive change through direct investments aligned to specific sustainability dimensions. Some private equity and venture capital firms are developing funds that specifically target sustainable businesses. A study published in 2023 found that improving fund-level ESG footprints by 50% explains a statistically and economically significant net IRR increase of up to 12.4% over a fund’s life cycle.⁶ As private markets investors and allocators observe attractive returns from these strategies, demand for sustainability-driven investment vehicles will continue to rise.

Reason 9: Innovation breeds new financial opportunities

The sustainability sector has been a driver of technological and business-model innovation. Companies are pioneering carbon capture technologies, developing sustainable materials, or rethinking existing products and services for a circular economy. These advances offer new and potentially lucrative opportunities for investors who want to balance sustainability desires with target returns.

In an informal survey of participants who joined our recent webinar, ESG 2.0: The Future of Regulation, Data Integration, and Sustainable Investing, we asked participants about the challenges they face in incorporating ESG into their investment processes. Perhaps not surprisingly, respondents reported challenges with manual processes, a lack of a centralized platform, multiple data vendors and tools, and report layers as hindrances to their investment processes. As innovation breeds incredible change, firms need a platform that can grow in lockstep and enable them to manage the complexities of their ESG investments.

Understanding the Path Forward

To learn more about sustainable investing and how you can ingest, normalize, transform, and report on your ESG data, watch our on-demand webinar ESG 2.0: The Future of Regulation, Data Integration, and Sustainable Investing.