The COVID-19 pandemic has rocked markets and reshaped the way we interact with each other. But one unexpected side effect of this pandemic has been investors' acceleration into the entry of environmental, social, and governance (ESG) funds.
In 2020, equity funds focused on socially-responsible investing (SRI) and ESG principles saw a nearly threefold increase, to around $169 billion. Will this trend continue into 2021, and what should traders know about ESG investing?
Why Was Sustainable Investing So Hot in 2020?
Analysts point to several factors contributing to this rise in ESG funds, including an increased focus on the impact of climate change, the presidential election, and the economic impact of the pandemic on many small businesses. Climate change is a particularly hot topic, with many investors worried that the practical costs of climate change aren't adequately being priced into major market indexes. In other words, the companies and industries that may be hard-hit by the coming climate crisis could suffer a lasting loss in value unless they take steps now to improve their sustainability. The link between climate change and more frequent (and more damaging) natural disasters has been established, and these disasters can have a real impact on businesses, particularly those in coastal areas.
Another factor boosting the entry into ESG funds, particularly in the fourth quarter, was the presidential election. Investors expect the Biden administration to support environmentally-friendly policies, increase the minimum wage, and focus resources toward renewable energy, all some of the primary tenets of ESG investing. By getting a foothold into these funds now, investors may believe they're poised to take advantage of sweeping policy changes and hope that they can reap some of the benefits of these changes.
Finally, the recent stampede toward ESG investing has been enabled by the increased availability of ESG funds. Many new funds hit the market in 2020, and with a new presidential administration taking office in 2021, even more ESG funds are likely to appear over the next four years. This increased availability is good news for investors, as the additional competition can drive down expense ratios and give a boost to the supply side of the supply-and-demand equation.
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