The views expressed are those of the author and do not necessarily reflect the position of FORESIGHT Climate & Energy

Investors are aware that ESG-based investments can bring speedy returns

At the beginning of 2020, environmental, social and governance (ESG) investing was identified as this decade’s ultimate investment megatrend. We knew it would cut across all sectors and have a disproportionate impact on the energy industry and its ongoing transition, but we could not predict just how much and how quickly it would develop. When the pandemic hit, the world changed forever, accelerating those global trends with a momentum no one witnessed before—including ESG concerns. The umbrella term covers three main factors. E is for the environment and includes issues such as climate change policies, carbon footprint and use of renewable energies. S is for social and includes workers’ rights and protections. Finally, G is for governance and includes diversity of the board and corporate transparency. In June 2020, around 26% of our clients around the world were eyeing exposure, or already had exposure, to ESG investments. This has now increased to 44% over the past 12 months. This trend is set to gain further momentum.

INVESTOR CONFIDENCE First, governments and regulators are becoming increasingly supportive of ESG criteria which boosts investor confidence. In the United States, the Biden Administration is taking a tougher approach on the use of fossil fuels and is promising swift action to tackle climate change. Additionally, the new chairman of the Securities and Exchange Commission, the US’s financial regulator, Gary Gensler, is a proponent and is likely to strengthen investment and disclosure rules to help the US catch up with Europe. Secondly, as millennials (those born between 1981 and 1996) who are more likely to seek responsible investment options, become the major beneficiaries of the largest intergenerational transfer of wealth—an estimated $30 trillion in the next few years—we can expect both retail and institutional investors to continue to pile into ESG. Finally, the pandemic has focused minds on the fact that the health of our planet directly affects human health which, in turn, affects the way we all live and work. What is perhaps more impressive is that those investments with robust ESG credentials are continuing to outperform the market and experience lower levels of volatility. This booming ESG trend is going to have a significant accelerating effect on the energy transition because as it becomes ever more mainstream, institutional investors will increasingly pile into renewables. When they do, they will bring even higher levels of capital and expertise into the energy sector. In turn, this is likely to trigger greater regulatory scrutiny, which will further drive confidence for investors, as well as impact policy agendas for governments and their agencies. All of this positive movement in the transition can be expected to have the effect of lowering prices which can only speed up mass adoption of green energy.•

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