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ESG equity market hit new heights in the second half of 2020

The global ESG equity market reached new heights during the second half of 2020, driven by the growing adoption of ESG integration by large US investors and a rapid expansion of the ESG themed fund market.

According to Leaders Arena’s latest biannual ESG Equity Market Monitor study, equity assets that integrate ESG totalled $8.3tn and represented almost 17% of the overall equity market by the end of 2020.[1] Although the recovery of the global equity markets which reached a record $50.3tn in Q4 2020 set the context for this growth, there were two other key drivers for the growing volume of equity assets integrating ESG.

The first driver was the growing number of US investors integrating ESG into the investment process. ESG integration increased its market penetration in the US from 5.6% in Q4 2019 to 8.8% by the end of 2020, the fastest growth across all geographies since Leaders Arena’s research began in 2010. 2020 notably saw Neuberger Berman and T. Rowe Price among the growing list of large US investors which have embraced ESG integration across their portfolios.

The US is the largest ESG equity market in absolute terms, valued at almost $3tn but in relative terms, the study found that ESG integration in the US continues to lag behind Europe. As the fastest growing ESG market, however, Leaders Arena expects US investors to continue expanding their ESG products and for ESG investing to become mainstream. Globally, Norway and the Netherlands remain the most mature ESG markets, with ESG integration across equity investments reaching 97.1% and 93.8% respectively.

The second driver was an increased interest in ESG-themed funds and in particular, ESG ETFs as managers seek to capitalize on companies that can provide solutions to Environmental and Social challenges. During 2020, we saw 75 new ESG-themed equity funds launched with focuses on best-in-class ESG companies, as well as on themes such as climate, water, and smart cities. These funds and ETFs are aimed at the growing demand from millennial investors for sustainable investing and hit on a wide range of popular sustainability themes. Leaders Arena expects that ESG-themed funds will soon reach 10% of the total value of the ESG equity market, and as such, companies’ ESG communication plans should start considering adopting a more targeted approach for these funds.

What impact does this have on companies?

The continued growth in ESG-focused investment capital represents a continued opportunity to integrate a company’s sustainability story with its equity story. Proactive outreach to investors offers companies an opportunity to attract and retain long-term-oriented capital and gain invaluable feedback during the process.

Looking forward in 2021, Leaders Arena expects to see continuing trends and growing interest in a wider range of sustainability issues. We continue to monitor the growing investor expectations on companies, such as BlackRock’s 2021 Stewardship Expectations report which highlights the importance of diversity and its increased focus on biodiversity as key engagement priorities for 2021. There is no better time than now for companies to start or continue making stronger commitments to their sustainability reporting and investor communication.

Download the study here.

[1] Leaders Arena ESG Investor Scorecard

Our comprehensive database analysing the extent to which institutional investors are focused on ESG integration within their investment processes. Our research across 8,000+ investors is based on 30 data pillars and produces a score and detailed investor profile that provides insight into key issues focused on by their investors.

Leaders Arena’s unique advisory services and related research supports our clients through offerings such as comprehensive ESG investor targeting and peer benchmarking. This allows our clients to evaluate and improve their ESG programs, conduct more effective investor outreach, monitor progress and maximise the available ESG market opportunities. For those companies starting in this journey, we support their ESG disclosure efforts including how to prioritise ESG communication with ESG ratings agencies.

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