Surfing the Next Wave of ESG Investment
Produced by Bloomberg Media Studios in partnership with Standard Chartered.
Waning enthusiasm has investors questioning whether the ESG boom is over, but a new report suggests the party is just getting started—especially in emerging markets.
ESG funds garnered over $300 billion worth of investment since the start of 2019[¹]. Inflows appeared unstoppable until this May, when equities-focused ESG ETFs posted outflows for the first time in nearly six years[²]. Skepticism about whether sustainable investments make a difference, concerns over greenwashing and the lure of more attractive returns elsewhere derailed momentum.
Despite speculation that ESG funds have seen their best days, Standard Chartered’s Sustainable Banking Report 2022 tips $8.2 trillion worth of sustainable investment potential through 2030 across key growth markets in Asia, Africa and the Middle East—markets where climate change, inequality and other threats loom largest.
“There has been a lot of talk about whether ESG is a fad,” says Marc Van de Walle, Global Head, Wealth Management, Standard Chartered Bank. “Much of that ties back to how different ESG funds perform. It’s clear to us that ESG is here to stay. The world faces global problems across all three dimensions of ESG. Climate change, social inequality and data privacy, for instance, are global challenges that require a collective response. Investing in funds that promise to advance solutions or reinforce positive behaviors targeting to solve those challenges enables everyone to make a difference.”
Untapped Potential
A glance at the data reveals a defining characteristic of sustainable investment inflows: The lion’s share comes from institutional investors in Europe and the US. Globally, retail investors play a minor but growing role. And emerging markets are slow to the game.
“ESG investing has become more prevalent for consumers over the past five years, yet they only account for around a quarter of investments in this space,” Van de Walle says. “From a geographical perspective, around 80% of that investment takes place in Europe and the US. One of the key takeaways from our Sustainable Banking Report is that 93% of people we spoke to in our footprint markets across Asia, Africa and the Middle East are interested in sustainable investments. So, there’s huge untapped potential.”
Aggregate net personal wealth across select emerging markets in Asia, Africa and the Middle East grew 159% between 2010 and 2020. As these countries become more prosperous, Van de Walle anticipates greater participation in sustainable investment. Standard Chartered’s Sustainable Banking Report points to China and India as the heavyweight contenders most likely to drive a surge of inflows in the years ahead.
Barriers and Opportunities
Despite their best intentions, most people don’t know where to begin their sustainable investment journey. Nearly half of investors surveyed by Standard Chartered cited a lack of accessibility as a key barrier followed closely by comprehensibility. Removing those barriers is vital to accelerate inflows.
“On the access front, banks simply must increase their ESG offerings,” Van de Walle says. “Providing information is a bigger challenge. If you look at some of the agencies that provide ESG metrics, they often disagree among themselves. That confuses investors. The industry needs to work with regulators to arrive at standards that everyone can agree on and that make it easy for investors.”
Regardless of where they fall on the wealth spectrum—emerging affluent, affluent or high net worth—investors struggled to overcome the same barriers. One noticeable difference surfaced in their motivations: where emerging affluent and affluent investors indicated “helping the environment” as the reason they are keen to embrace sustainable investing, high-net-worth investors aimed to “enhance financial returns”.
While their ambitions tend to overlap, retail investors often face different challenges and have unique personal life goals. In turn, their needs differ — another highlight unveiled in Standard Chartered’s report. Understanding different investor personas plays a vital role in delivering against those needs and helping them make the most of their investments.
The Path Forward
Solving challenges around accessibility and comprehensibility demands a concerted effort across the financial and regulatory industry. On the regulatory side, it entails de-jargonizing the language around reporting metrics and making data easier to access. On the banking side, it’s simply about offering more products in a transparent, easy-to-understand manner.
“There are two ways Standard Chartered is responding to demand for sustainable investments,” Van de Walle says. “The first is offering ESG products to clients and providing the information they need to make informed decisions. For instance, we give ESG scores to the underlying funds that we offer to ensure investors understand what they are putting their money in.
“The second is personalizing our conversations to meet unique client needs. We spend a lot of time educating and empowering our relationship managers—the people who spend the most time with our clients—to provide guidance tailored to different investment personas so we can help clients realize their sustainable investment goals.”
[1] Bloomberg [2] Bloomberg [3] Sustainable Investing Report 2022