Sustainable investment is an alternative that allows investors to make money and fight climate change and social inequalities. At the end of 2022, the ESG (Environmental, Social and Governance) investment market amounted to 2.5 trillion dollars. And it continues to grow.

Can you imagine making your investments profitable while helping to improve the planet? That is the goal of sustainable investment, better known as ESG investment. An acronym that refers to  Environment, Social and Governance. This way of investing has not stopped growing thanks to its objectives and good profitability. We tell you everything you need to know about this market that already amounts to 2.5 trillion dollars.

ESG investing considers environmental, social and governance aspects when selecting financial assets, marking a change. Investors, mainly institutional, choose companies that reduce their carbon footprint, encourage social inclusion or promote gender equality. This may involve excluding industries such as arms or tobacco. 

The global goal of achieving zero carbon emissions by 2050 requires massive investment: an estimated $9.2 trillion annually, according to the consultancy McKinsey. ESG investment seeks to attract private capital to finance this transition towards sustainability and meet climate goals, both in Europe and in emerging countries.

An investment that never stops growing

Sustainable investment is difficult to analyse globally due to the lack of regulation in most territories. However, according to estimates by Morningstar, a financial services company, global assets in sustainable funds reached $2.5 trillion at the end of December 2022. By the end of the second quarter of 2023, capital inflows into this investment style had increased by $18 billion worldwide.

Another relevant fact is the one highlighted by Bank of America, which indicates that, until February 2023, investment in debt funds with environmental, social and governance criteria has reached 244 billion dollars, marking a historical record. A particularly interesting fact since this is the most conservative and change-resistant fixed-income market.

Is this style of investment profitable?

You might think that investing in sustainability is not profitable. Nothing could be further from the truth.  In terms of performance, ESG equity funds achieved an average gross return (before fees) of 3.3%, compared to 0.8% for comparable conventional funds between January 2019 and December 2021, according to the European Securities and Markets Authority (ESMA). In the US, the JULCD, JUST Capital’s market-leading index that tracks the performance of large public companies with high ESG scores, outperformed the Russell 1000 stock index in 2017, 2018 and 2019.

Finally, according to the Barcelona School of Management, more than half of the studies indicate that companies that invest in ESG experience an improvement in profitability by reducing risks and increasing investment value thanks to responsible management. Other studies, however, do not show a clear or positive relationship between ESG investment and profitability. 

Sustainable megatrends: where is green money going?

Sustainable investment encompasses numerous trends, some more relevant than others. Without a doubt, the first of these, as pointed out by various asset management companies – Abrdn, Capital Group or Natixis – has to do with energy. Not only in the promotion of renewable energies but also in the need for European countries to guarantee greater energy independence. In fact, at this point, there are investment opportunities in energy efficiency – companies that achieve more with less consumption – new sources such as hydrogen, energy storage and even nuclear energy.

 If energy is the most obvious and well-known trend, there are other equally important ones.  Biodiversity stands out, as the asset manager AXA IM points out. Although it may sound ethereal, within it there are opportunities in companies focused on collecting plastics from the ocean for recycling, in more efficient water management or even in companies that propose solutions to capture CO2 and reuse it as a source of energy.

Diversity deserves attention in the social sphere. Reports by Credit Suisse, Exane and Morgan Stanley find a positive correlation between employee diversity and the performance of company stocks. Studies by McKinsey and BCG also show that diverse management teams are more likely to have superior performance in profitability and value creation. For this reason, management companies look for companies that have a diversity plan and meet certain standards.

All in all, we are faced with a new market – or investment philosophy – that is growing and that presents great opportunities for investors, both in terms of profitability and values.