What will increased momentum for social change mean for ESG investing?

by: , Chief Investment Officer and Managing Director | IndexIQ; IndexIQ,

In our previous blog we talked about the impact the coronavirus-driven economic slowdown has had on the environment. One consequence is that it has further raised awareness of the ways in which industrial activity affects the planet, shining a very bright light on the “E” in ESG investing.

But COVID-19 isn’t the only major event currently unfolding that is reshaping how we view our world. Demands for social justice on a scale not seen since the 1960s are also driving significant change, particularly within the U.S.

Historically, corporations generally sought to avoid controversy, and stayed out of what could be referred to as political debates. That is now much harder to do, and many companies have come to embrace an issues-oriented approach to doing business and engaging with the marketplace.

As with sustainability and environmental awareness, these ideas are increasingly getting built into corporate strategies. For the ESG investor, this provides a wealth of new insights and data, all of which can potentially allow for improved portfolio (and index) diversification across sectors and industries, more diversified holdings, and the potential for improved long-term returns.

Assuming consumers continue to pressure companies for change – and favor those brands they believe to be most closely aligned with their values – the momentum behind ESG investing will continue to grow.

The U.S. has a lot of room to run in this regard. In Europe, ESG strategies pulled in a record $132 billion in new assets in 2019.  In the U.S., mutual funds and ETFs focused on sustainability saw just over $20 billion in new flows during the same period. But investor interest has been growing and that $20 billion was four times the flows from the year before. Around the world, the percentage of both retail and institutional investors that apply environmental, social, and governance (ESG) principles to at least a quarter of their portfolios jumped from 48 percent in 2017 to 75 percent in 2019, according to a study from Deloitte released earlier this year.

Which is not to say there aren’t challenges. As ESG investing has accelerated, regulatory scrutiny has picked up as well. In the US, regulations have been proposed that would require those institutional investors subject to Employee Retirement Income Security Act (ERISA), like pension funds, to demonstrate that ESG investing supports the long-term appreciation of plan assets. In other words, to show that return is not being sacrificed by adhering to ESG principles.

The reality is that ESG factors can have an impact on corporate returns, as regulators like the Department of Labor have acknowledged. Policies with regards to diversity, global warming and sustainability can present material business risks through regulatory action, litigation, loss of consumer confidence, reputational damage, and brand erosion, all potential consequences that can ultimately translate into negative market performance. But it is not enough for companies to simply point to their historic policies and concerns and expect the world to move on. People are demanding updates, answers and specifics from brands in ways never seen before, which certainly presents new business challenges but also tremendous opportunities. Viewed through this lens, the adoption of specific, actionable ESG policies can in fact confer a competitive advantage. As we noted in our last blog, embracing ESG can simply be good business.

Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.

This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

“New York Life Investments” is both a service mark, and the common trade name, of certain investment advisors affiliated with New York Life Insurance Company. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC and serves as the advisor to the IndexIQ ETFs. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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Salvatore J. Bruno

Chief Investment Officer and Managing Director | IndexIQ

Sal is Chief Investment Officer at IndexIQ, where his primary responsibility includes developing and maintaining the firm’s investment strategies. Sal joined IndexIQ in 2007 from Deutsche Asset Management (DeAM) where he held a number of senior positions

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