Your ESG Ratings Are Increasingly Driving Investment Decisions. Whether You Know It or Not.
So, no investors have specifically asked you about your ESG initiatives lately. Don’t make the mistake of believing it’s because they’re not interested. According to a recent report by US SIF: The Forum for Sustainable and Responsible Investment, the total US-domiciled assets under management using sustainable, responsible, and impact (SRI) strategies grew from $8.7 trillion at the start of 2016 to $12.0 trillion at the start of 2018, representing “26% — or one in four dollars — of the $46.6 trillion in total US assets under professional management.” Clearly, even if investors aren’t getting their ESG information directly from you, they’re getting it from other sources, and using it to make investment decisions.
ESG investments are often passive.
Investors are looking for and buying stock in companies that are doing the right things in the environment, social, and governance arenas. One reason you might not be fielding a lot of pointed questions from your investors about these topics is that many use exchange-traded funds (ETFs) to passively invest in companies that do best in these areas. In other words, they don’t speak directly to the issuers. Instead, they rely on information and reports from rating agencies, such as Sustainalytics and MSCI, to identify and buy baskets of funds based primarily on ESG scores. If you are not making the effort to disclose information to these agencies, it’s possible your stock is being excluded from the indices, and you’re missing out on opportunities to reach investors who may not yet be on your radar.
These funds are growing exponentially. BlackRock, Vanguard, Morgan Stanley, Goldman Sachs, and Clearbridge all added ESG ETF products during 2018. EFTGI, a leading independent ETF research and consultancy firm, reported that global assets invested in ESG ETFs and other products were up nearly 34% in the first 11 months of 2018 from the year-ago period, compared with just 4.6% year-over-year growth in the assets of all ETFs/ETPs trading worldwide.
And, these funds are expected to continue to grow. BlackRock projects that ESG ETF fund assets will grow from USD25 billion to more than USD400 billion by 2028, driven by increased interest from retail investors and continued strong demand from institutions. That rapid growth will increase the total share of ESG ETF and mutual fund assets under management from 3% today to 21% by 2028—an enormous jump with major ramifications for the makeup of your investor base. That’s just one of the reasons why it’s so important to understand your ESG rating agency reports and what they have to say about your company.
A potential bear market isn’t going to stop growth in ESG assets.
Last summer, Arabesque, an asset management and research firm that focuses on ESG issues, did an analysis of all U.S. stocks for Fortune, looking at data going back to 2007. The analysis concluded that stocks that finished in the top quintile based on their ESG metrics outperformed those in the bottom quintile in the four worst years for the stock market in that stretch—2007, the financial-crisis crash year of 2008, 2011, and 2015. The margin ranged from 1.8 percentage points in 2007 to a whopping 13.5 points in 2008.
It appears that the big fund families building ETF portfolios are well aware of the advantages of these funds, in any market conditions. In a recent Marketwatch article, Carolyn Weinberg, iShares global head of product at BlackRock, said that “ESG can now be implemented without giving up risk-adjusted returns.” Choosing to invest in companies that treat their workers right, support local communities, and show respect for the environment and their customers’ privacy (to name just a few ESG metrics) is no longer solely a moral decision. It’s a smart financial move, too, as investors continually find that companies with these priorities perform well, even when the chips are down.
No time like the present to prioritize ESG.
With the stock market showing some signs of softening, and ESG EFTs growing rapidly, it’s the ideal time to make sure your ESG communications strategy is up to snuff and that it includes tactics for disclosing information to ESG rating agencies. If you have questions about the best ways to integrate ESG into your strategic investor relations plan, or if you’re looking for help understanding your first ESG ratings report, give us a call. And make sure your ESG efforts are getting the attention they deserve.