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Why ESG Investing Grew in 2020

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Whether by choice or out of necessity, many of us experimented with something new in 2020 – from an at-home haircut to new baking projects to wearing sweats basically 24/7. (Not just us? Great!) That desire to test out a different approach even carried over to how some people invested money in the market: 2020 saw a surge in demand for investments that focus on a company’s environmental, social and governance (ESG) ratings.

Goldman Sachs Research analysts note that "ESG has evolved from a specialist field to a mainstream investment concern".

You’ve probably heard about ESG (or sustainable) investing before, but here’s quick refresher on the term if you need one. This type of investing essentially means considering a company’s impact on broader issues – like protecting the environment, promoting workplace diversity or looking into how executive and employee pay stack up.

Going mainstream. ESG isn’t exactly new, but it’s been growing in popularity. “ESG has evolved from a specialist field to a mainstream investment concern," Goldman Sachs Research analysts noted in a recent report.  

Just how popular is ESG investing these days? One in three dollars in the U.S. that are professionally managed are invested using this strategy, according to Forbes. And in 2020, exchange-traded funds that focus on ESG practices attracted a record $27.4 billion in investments, The Wall Street Journal reported in December, citing data from FactSet. As a result, the sector doubled in size.

The Covid-19 pandemic and social movements may have helped to boost demand for ESG investments in 2020.

The Covid conscience. CNBC noted that “Covid-19 may well prove to be a major turning point for ESG investing.”  So what made 2020 a good year for ESG? 

“The Covid-19 pandemic and movement for racial justice in the U.S. have kept attention on social issues, including workplace safety and diversity, and have likely added to interest in sustainable funds,” according to a September report from Morningstar, quoted by CNBC. And while environmental issues were “arguably the most high-profile of the trio,” CNBA also noted that investors may increasingly shift awareness to the “S” and the “G” of ESG, which correspond with companies’ social and governance attributes.

ESG performance paid off. Beyond having a positive impact on society, ESG investors also want to see the value of their portfolio go up – and ESG proved to be “a rare bright spot” during the market turbulence in early 2020, The Wall Street Journal reported. Through late November, about 40% of ESG funds were in the top quartile of performance for the year compared with their non-ESG peers, John Goldstein, head of Goldman Sachs’ Sustainable Finance Group, noted on a recent episode of The Daily Check-In. 

But could investors do good, even if the market wasn’t doing so well? Before the pandemic, some people questioned whether ESG investing is “a bull market luxury,” and the past year offered an answer, Goldstein said. During the first quarter, when times got tough and the S&P 500 fell about 34% in just over a month, “ESG really held in quite, quite strongly,” he added, showing that this field of investing got a stress test – and passed.

The plusses and minuses of more demand. Remember supply and demand concepts from Econ 101? Well, then it may not come as a surprise that an increase in demand for ESG-focused investments has also resulted in a larger supply of available options. As of mid-December, the number of new ESG related ETFs that launched in 2020 was nearly double 2019’s tally, The Wall Street Journal reported. And there’s likely to be continued demand in the coming years, as some investors expect new legislation that will be aimed at combating climate change.

We could be on the cusp of a “sustainability revolution” that may provide additional opportunities for investment in the next decade.

Even so, more interest in ESG investing (and more offerings in this space) has some people debating the “wokeness” of some funds, Bloomberg reported. Investors may be surprised to find companies in funds seem at-odds with the ESG mission they were seeking in the first place. The Bloomberg piece explains it like this: “Complicating socially conscious investing is the fact the Securities and Exchange Commission doesn’t regulate how the ESG label is applied, though it’s considering adding rules for funds that call themselves ESG or sustainable.”

What’s ahead for ESG. Still, there are reasons to be optimistic about the future of the ESG industry, as Alexis Deladerrière, head of International Developed Markets for Goldman Sachs Asset Management’s Fundamental Equity team, explained at an October 2020 Goldman Sachs Asset Management forum discussion. “We’re on the cusp of a sustainability revolution, which could have the scale of the Industrial Revolution with the speed of the digital revolution,” he said. “We believe the providers of green technologies represent attractive investment opportunities over the next decade.” 

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.