ESG market growth accelerates in 2020, led by greater ESG integration among US investors
Despite the substantial market decline during Q1, global equity markets recovered significantly during Q2, nearly recouping their losses as investors weathered the initial COVID-19 shock and gained confidence in a longer-term recovery. Outpacing this upturn, the level of equity assets fully integrating ESG criteria reached almost $7tn according to Leaders Arena’s latest research.
Despite the COVID-19 related market turbulence during Q1, ESG ownership in global listed equity markets continued to grow in actual USD value terms and as a proportion of the overall market during Q2.
The value of ESG equity assets managed by Sustainable and Responsible Investors (SRIs) globally increased in H1 2020 by nearly $1tn to $6.93tn.
ESG integration in the US experienced the fastest growth across all geographies, growing from 5.6% to 8.3% of that market’s total equity assets over the first half of 2020.
ESG ownership in listed equities looks set to continue to grow on the back of rising demand for ESG investment products and the increasing adoption of ESG integration.
Figure 1: Global ESG equity market AuM (USD trillion) and % ESG ownership vs. total equity investments
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According to Leaders Arena’s latest study, global equity markets recovered strongly during Q2 2020, which saw the total value of global equity investments increase by 32% from Q1 to $42.3tn during Q2 based on economic recovery hopes. Outpacing this recovery, the value of ESG equity assets managed by SRIs globally increased exponentially during Q2 by 51.8% to $6.9tn.
From a company perspective, the increase in the level of ESG-focused equity assets translates into an overall increase in the presence of SRI investors in the shareholder base. The average SRI ownership reached 16.4% of all institutional ownership across listed companies. In actual terms, the value of ESG capital invested in equities increased by almost $1tn in the first half of 2020 and is on track for the largest year-on-year increase since 2016.
Key growth drivers in ESG equity assets include:
A growing market for ESG-themed funds and ETFs which has seen an increase in assets of 13% since the beginning of 2020.
An increase in the number of large investors in the US integrating and engaging on ESG.
Geographical ESG integration
ESG integration increased its market penetration in the US from 5.6% to 8.3% during H1 2020, the fastest growth across all geographies. This was also the largest increase in ESG integration in the US equity market since Leaders Arena began tracking this data in 2010. US managers have increasingly become more comfortable with the concept of integrating ESG factors into their investment decisions. Notably, Neuberger Berman and T. Rowe Price are among the growing list of large US investors that have embraced ESG integration across their portfolios.
The US continued to be the largest ESG market on an absolute basis with $2.4tn in equity assets under management (AuM) integrating ESG, representing more than 35% of the global ESG equity market.
However, in relative terms, ESG integration in the US still lags behind Europe, whose large pension funds and asset managers began considering ESG factors in their investments before their US counterparts. The most mature ESG markets continue to be the Netherlands and Norway, with a market impact of ESG integration across equity investments at 97.7% and 97.2% respectively.
ESG funds and ETFs
Figure 2: Growth of Equity ESG ETFs & ESG-themed funds market
The capital invested in ESG-themed funds and ETFs has also significantly increased since last year. Valued at $378.6bn at the end of 2019, the market for ESG-themed funds and ETFs invested in equities had increased to over $428.5bn as of June 30, 2020. Twenty-three new ESG equity funds were launched in the first half of 2020, 14 of which were ETFs. Interest in ESG-themed funds and ETFs is at an all-time high and is expected to continue to grow over the coming years.
ESG integration leaders
Investors are increasingly integrating ESG factors into their investment decision-making processes.
Companies seeking to have a meaningful dialogue on ESG should prioritise meeting with the highest rated investors in Leaders Arena’s ESG Investor Scorecard. ESG-focused investors Hermes Investment Management, Robeco Institutional Asset Management and Boston Common Asset Management are currently the highest rated investors based on our methodology.
What is the opportunity for companies?
The continued growth in ESG investment capital allocated to companies represents a tremendous opportunity to integrate a company’s sustainability story with its equity story.
Reaching out to this audience of SRIs allows companies to attract and retain long-term-oriented capital and gain invaluable feedback during the process.
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.
 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.