Why ethical investing is at a tipping point

By Meaghan Victor

February 23 2021
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Best-selling author Malcolm Gladwell said it best: “Look at the world around you. It may seem like an immovable, implacable place. It is not. With the slightest push – in just the right place – it can be tipped.”

As we round the corner into 2021, ethical investing is at a Gladwell-style tipping point.

Over the next 10 years, we predict there will be an eightfold increase in global ESG exchange-traded fund (ETF) and index mutual fund assets to more than US$1.3 trillion – the biggest shift towards ethical investments in a generation.

Three trends will underpin this shift.

First, a return to social values.

Ironically, the extraordinary policy responses to another crisis laid the foundation for the turmoil of 2020. Massive fiscal and monetary policies implemented after the global financial crisis rewarded holders of financial assets but did precious little for the broader economy.

So, while capital markets rallied, challenges with ESG festered, paving the way for today’s divisive, populist politics. COVID-19 was the spark that set these issues alight for investors.

The ensuing chaos of 2020 had one clear side effect: more people began to align their investment choices with the values stirred by social, financial and political inequities exposed around the world.

At the same time, the COVID crisis has underscored how non-financial ESG factors can impact long-term valuations. While ESG’s ‘environmental’ component has been readily understood, the pandemic has pulled the ‘social’ and ‘governance’ attributes into sharper focus.

We saw that in the first half of 2020, as the pandemic combined with protests against police brutality and racism in the US and around the world, creating heightened awareness of social justice issues.

In addition, factors such as a company’s contingency planning and work environment are also becoming top-of-mind for many investors. These ESG issues will differentiate companies to a much greater extent in the future.

Second, investor demand for choice.

Since we launched the first two ETFs in Australia two decades ago, a lot has changed.

Our critics used to say that ETFs were only for bull markets. But last year, ETFs proved more popular than ever as investors sought diversified exposure.

The Australian exchange-traded product (ETP) industry is now on the cusp of reaching $100 billion in assets under management.

Investors are drawn to ETFs for their transparency and ability to offer diversification through a basket of securities in one single trade.

Their low-cost and simple characteristics have also meant they have democratised investing, giving investors access and choice to equities that decades ago would have only been accessible to a select few. With technology and recent launches, that choice now includes ESG.

Sustainable ETFs have been slow to keep pace, making up only a fraction of global ETF inflows – until recently...

According to Morningstar, global inflows into sustainable funds during the third quarter of 2020 were up 14 per cent to US$80.5 billion. In Australia and New Zealand, flows edged higher at 15 per cent compared with the second quarter.

Third, Baby Boomers are preparing to transfer their wealth.

Something else has happened during the global pandemic. Stay-at-home orders around the world resulted in more forced family togetherness.

Boomer parents and their stuck-at-home children are having real conversations about personal values, which has naturally flowed into discussions about estate planning, planned giving and family philanthropy as a means to enact real societal changes.

According to Cerulli Associates, Boomers will pass nearly US$48 trillion in assets to their heirs and charities over the next 25 years. When we include assets from Generation X – those born between 1965-1980 – Cerulli suggests that US$68.4 trillion will be transferred by US households over the next quarter century.

In Australia, Griffith University researchers expect the next generation to inherit an estimated $3.5 trillion over the next 20 years.

That’s the largest transfer of wealth in history, and has the potential to fuel incredible growth in ESG investing over the next decade, especially when you consider the investing habits of young Australians.

A recent State Street Global Advisors study found that 82 per cent of Millennials say a company’s social, political or environmental impact is important to their decision on whether to invest.

Millennial investors also have more than two-and-a-half times the allocation to ESG investments than Gen Xers, and nearly triple that of Boomers.

As 2020 disappears in the rear-view mirror, we find ourselves at a tipping point in history. From this year’s human tragedy, a passionate commitment to affect long-lasting, positive changes has emerged. There is no turning back.

The last two decades were about laying the foundations for investing. The next will be about putting ESG investing into action.

Meaghan Victor is head of SPDR ETFs Asia Pacific Distribution at State Street Global Advisors.

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