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ESG investing is here to stay

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ESG investing has really taken off in the last few years. ESG funds saw inflows over $21bn in Q1 2021. To put this into context, there were inflows of $51bn during 2020 as a whole, $21bn in 2019 and $5bn in 2018(1). While some may question whether ESG investing is just a fad, there’s strong evidence that it’s here to stay for the long-term and will continue to grow.

A climate crisis

A key driver of ESG investing is the sheer volume of capital that’s needed to tackle some of our greatest challenges, particularly climate change.  For example, the International Renewable Energy Agency calculates that $120trn of global energy sector investment will be required to limit global warming to well below 2 degrees above pre-industrials levels, in line with the Paris Climate agreement(2). This is over 2.5x the size of the total US stock market(3).

Limiting global warming is becoming more urgent. In August, the Intergovernmental Panel on Climate Change issued a very sobering report, described by UN Secretary-General António Guterres as “code red for humanity”. The report(4), produced by over 200 scientists globally, found that humans are responsible for global warming – and greenhouse gas emissions are the main driver. Even in the best case, the world is likely to be 1.5 degrees warmer by 2040. Rapid and wide-ranging cuts in carbon emissions are needed to achieve the Paris Climate agreement.  If no action is taken, temperatures could rise over 4 degrees by the end of the century.

COP26 is crucial

Glasgow is hosting the 26th UN Climate Change Conference of the Parties – better known as COP 26 – between 31 October and 12 November, with over 30,000 visitors due to attend. If we’re to have a chance of meeting the Paris Climate agreement, it’ll be crucial to ensure good progress is made on the conference’s 4 key goals(5):

  1. Secure global net zero by 2050 to keep 1.5 degrees within reach
  2. Adapt to protect communities and natural habitats
  3. Mobilise finance to fund this
  4. Work together to deliver solutions

Securing global net zero by 2050

Looking at the first of these goals, encouraging steps have been taken to secure net zero, but more needs to be done.

While it’s estimated that around 70% of global carbon emissions are now covered by a net zero policy, since the US, China, Europe, Japan, the UK and many other countries have set targets, as yet no policy has been set for the remaining 30% of emissions(6).

And while 113 of the 191 countries signed up to the Paris Climate Agreement have submitted updated emissions reductions targets ahead of COP26, some are yet to be submitted(7).

Where countries and governments lead, companies follow. Around 20% of the largest companies globally have now set some sort of net zero target(8), and more than 900 companies have targets in line with the Science Based Targets Initiative(9) – seen as the most stringent type of net zero target and aligned with climate science.

COP26 will help push more countries and companies to get on board with setting targets to achieve net zero by 2050, and importantly, with setting interim targets to start reducing their carbon footprints in the short-term. This will further increase the opportunities for sustainable investors to invest with countries and companies who are taking steps towards climate change. This all means that ESG investing is not a fad or fashion, it really is here to stay and there are an abundance of opportunities for investors in this space.

(1) https://www.cnbc.com/2021/05/09/esg-investing-to-reach-1-trillion-by-2030-head-of-ishares-americas.html

(2) https://www.investmentweek.co.uk/opinion/4026866/powering-winds-change-key-issues-powering-renewable-energy-revolution/page/2

(3) https://data.worldbank.org/indicator/CM.MKT.LCAP.CD?locations=US

(4) https://www.ipcc.ch/report/ar6/wg1/

(5) https://ukcop26.org/

(6) https://www.schroders.com/en/insights/economics/are-we-now-on-the-road-to-net-zero/

(7) https://unfccc.int/process-and-meetings/the-paris-agreement/nationally-determined-contributions-ndcs/nationally-determined-contributions-ndcs/ndc-synthesis-report#eq-4

(8) https://www.climateaction.org/news/one-fifth-of-the-worlds-largest-companies-have-set-net-zero-targets

(9) https://sciencebasedtargets.org/companies-taking-action