- ESG investing – which focuses on environmental, social, and governence factors – is becoming increasingly important for investors and companies.
- A new analysis by Bank of America Merrill Lynch takes a deep dive into ESG and shows the positives it offers for companies and people investing in the stock market.
- Here are the top 10 reasons to keep ESG investing in mind, according to BAML.
- Read more on Business Insider.
Investing in environment, social, and governance factors – or ESG – is a growing trend that’s sparked both interest and debate.
Many investors are growing increasingly aware of ESG and want to use their money for good. In turn, this has put extra pressure on companies to make sure that they adhere to ESG standards in their ranks.
“Our conversations with clients reveal a split between believers and sceptics,” analysts at the Bank of America Merrill Lynch wrote in a note Monday. “We can relate to the sceptics, as we too were unconvinced before we embarked on our research into these attributes,” they wrote.
But the devil is in the data details, the analysts wrote. BAML analysis of ESG investing revealed that inflows into ESG strategies over the next few decades could rival the size of the S&P 500 today, a significant amount of money. This all lends credence to the idea that it’s not merely another Wall Street fad.
“We see sticking power,” the analysts wrote.
Results from BAML’s Global Wealth and Investment Management survey showed that 67% of financial advisors have clients that have expressed interest in ESG factors. High-net worth investors, millennial investors, and women are the three groups that have the highest interest in ESG investing.
In addition, BAML shows that ESG has been a positive for companies and investors that have embraced the principles. It’s consistently been a solid indicator of company health, and has also translated into significant returns that outperform peers.
Here are the top 10 reasons that investors and companies should care about ESG, according to BAML.
1. ESG can generate alpha
“ESG could boost your returns by a significant amount,” the analysts wrote. “A strategy of buying stocks that rank well on ESG metrics would have outperformed the market by up to 3ppt per year over the last five years.”
2. There could be $US20 trillion of asset growth in ESG over the next 20 years
The top three groups that care about ESG are women, millennials, and high-net-worth individuals, according to the note.
“Based on demographics, we estimate over $US20 trillion of asset growth in ESG funds over the next two decades,” the analysts wrote. That’s equivalent to the size of the S&P 500 today.
3. It’s becoming increasingly difficult to analyse assets without ESG
A majority – 70%- of US assets cannot be analysed without ESG, the analysts wrote. In addition, assets tied to reputation, brand, and intellectual property have reached record highs for S&P 500 companies.
“Analysing financial metrics alone simply won’t suffice anymore, in our view,” the analysts wrote.
4. Happy employees equal better returns
According to BAML analysis, companies with high employee satisfaction rankings on Glassdoor.com have outperformed those with low ratings by nearly 5 percentage points over the past six years.
5. ESG scores are a solid predictor of earnings risk
“ESG is the best measure we’ve found for signalling future risk,” the analysts wrote. It’s superior to leverage or other risk and quality factors, they said.
6. ESG could have helped avoid 90% of bankruptcies
“15 out of 17 (90%) bankruptcies in the S&P 500 between 2005 and 2015 were of companies with poor Environmental and Social scores five years prior to the bankruptcies,” the analysts wrote.
7. Companies with higher ESG scores have access to cheaper capital
“Just like consumers have credit scores, companies pay different rates depending on their risk profiles,” the analysts wrote. The cost of debt for companies with better ESG scores can be nearly 2% lower than companies with worse scores.
8. An ESG-related scandals can mean huge losses for companies and investors
“Major ESG-related controversies during the past six years were accompanied by peak-to-trough market capitalisation losses of $US534 billion for large US companies,” the analysts wrote. “Loss avoidance is key for portfolio returns over time.”
9. Climate change is top of mind
Climate change is the top-ranked ESG concern for ESG asset managers, according to the US Forum for Sustainable and Responsible Investment.
There are currently $US3 trillion of ESG assets considering climate change as part of investment decisions, BAML wrote.
10. ESG is not a new trend or fad
“Stocks have been bought and sold on ESG concerns for decades,” the analysts wrote. “Today’s ESG discussions are largely focused on standardising or codifying these elements, like we have seen for accounting and financial standards.”
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