ESG investing came to the surface in January 2004, when former UN Secretary-General Kofi Annan wrote to 50+ CEOs of major financial institutions, inviting them to take part in a joint initiative under the guidance of the UN Global Impact with the support of the International Finance Corporation (IFC) and the Swiss Government.
The goal of that initiative was to facilitate the incorporation of ESG into capital markets. And a year later, the term was first used in a landmark report titled “Who Cares Wins”.
At the same time, United Nations Environment Programme (UNEP) produced the so-called “Freshfield Report” which portrayed ESG issues as unrelated to financial valuation.
These two reports then formed the base for the introduction of the Principles for Responsible Investment (PRI). Its role is to forward the integration of ESG into analysis and decision-making through thought leadership. Today, many exchanges around the world, have made ESG disclosures mandatory for listed companies.
2013 – A Tipping Point for ESG investing
The growth of ESG investing has not been everything but smooth and steady. It has had a fair share of struggles in the initial days.
Institutional investors were initially reluctant to accept the concept, arguing that their fiduciary duty was limited to maximizing shareholders’ values irrespective of environmental, societal impact, or broader governance issues such as corruption.
Another prime barrier has been a lack of data and the necessary tools to get complete information. However, corporate disclosure on ESG issues has improved since the launch of the Global Reporting Initiative (GRI) in 2000.
Today, over 80% of the world’s largest corporations use GRI standards. The adaption of ESG picked-up pace in 2013-14, when studies were published showing that good corporate sustainability performance is associated with good financial results.
When coronavirus first appeared in late 2019, market disruptions and uncertainties caused many investors to turn to ESG funds. In the first three months of 2020, investors globally invested $54.6 Billion in these funds. According to Bloomberg ESG assets are on track to reach $53 trillion, up from $37.8 trillion by year-end.
What Are ESG Funds?
ESG funds are those funds whose asset allocation mostly includes shares and/or bonds of companies that are evaluated based on Environmental, Social, and Governance factors.
While Europe accounts for half of the global ESG assets, the U.S. had the strongest expansion in 2021 and may hold a main stage in the category starting in 2022. The next wave of growth could come from Asia with a major focus on Japan.
Top 20 Largest ESG Funds by AUM
As of 31 December 2020, the 20 Largest ESG funds held more than $150 Bn in assets combined. These 20 funds collectively represent ~13% of the total assets under management (AUM) globally in ESG equity funds.
Learned something new from this article? Read more about the Rise of ESG in India and Top Funds in the country.