Biennial survey reflects “industry in transition”, with higher standards and expectations reducing status of negative screening.
The share of investments managed via sustainable strategies has risen by 15% over the past two years, accounting for more than a third (36%) of global AUM, according to the Global Sustainable Investment Review 2020.
The fifth edition of the Global Sustainable Investment Alliance’s (GSIA) biennial review reported that US$35.3 trillion of assets are managed using one or more of seven core sustainable investment strategies, based on combined regional data from the United States, Canada, Japan, Australasia and Europe.
The percentage of total global assets managed sustainably was 33.4% in 2018 and 27.9% in 2016.
The global rise in 2020 would most likely have been even higher, had it not been for changes in regulations and definitions around sustainable investing in the European Union and Australasia, which have tightened up what can be described as sustainable investments in those markets.
As a result, Europe recorded a 13% fall in assets managed via sustainable investment strategies, due to tighter definitions contained in the Sustainable Finance Disclosure Regulation, and other measures in the European Sustainable Action Plan. Australasia reported a comparatively modest rise of 25% since 2018, thanks to a tightening of industry standards, as well as a changed data source used to define the total market size.
These were more than offset by significant jumps in sustainable investment volumes in other markets over the past 24 months, with Canada (48%), the United States (42%) and Japan (34%) all registering steep increases.
Canada now has the highest proportion of sustainable assets of any market (62%), but Europe and US remain the biggest markets overall, accounting for 80% of total global sustainable assets in the period 2018 to 2020.
Short- and long-term social and environmental impacts
The survey reveals an industry “in transition”, according to Simon O’Connor, Chair of the GSIA.
“There is now a great variation in the scale and the growth of sustainable investment across different regions and rapid developments that are reshaping sustainable investment and really pushing to redefine best practice,” he said, speaking at a press briefing.
“Increasingly, there are expectations that sustainable investment is defined not just by the strategies involved, but by the short- and long-term social and environmental impacts that investors are generating through their sustainable investment approaches.”
The Global Sustainable Investment Review 2020 is based on reports from GSIA member organisations in the US, Japan, Canada and Australasia, as well as secondary industry data for Europe, including the UK.
ESG integration – the systematic and explicit inclusion of ESG factors into financial analysis – is now the most commonly reported sustainable investment strategy across all regions, accounting for US$24.6 trillion AUM. This is followed by negative screening, the most popular strategy in 2018, and corporate engagement.
O’Connor attributed an overall decline in negative screening partly due to changes in definition of sustainable investing in Europe. “Negative screening is being embedded as a core element of products and almost not being counted in some instances,” he said.
Strategy shifts and overlaps
The US accounts for two-thirds of global assets managed via ESG integration (US$16 trillion), which is now also the most popular strategy in Japan. Nominally, negative screening remains the most common strategy in Europe, but European strategy data in the 2020 report is an extrapolation of historical data, “due to no data being available for 2020 at a strategy level”.
The report also indicated a near doubling of assets being managed via themed investment strategies to nearly US$2 trillion, contrasting with a slight reduction in impact investing volumes. However. O’Connor said this could be explained by the “blurry lines” between these strategies.
Sustainable investment is defined inclusively by GSIA as investment approaches that consider ESG factors in portfolio selection and management across seven strategies – ESG integration, corporate engagement, norms-based screening, negative screening, positive screening, thematic investing and impact investing – recognising the existence of regional overlaps and variations in meaning and usage.
“Many investment organisations are using a combination of strategies, rather than solely relying just on one,” the report said.
Surging sustainable investment volumes
A new report from Bloomberg Intelligence said ESG assets are on course to top US$50 trillion by 2025, representing more than a third of total global AUM, which is set to rise to US$140.5 trillion. Bloomberg’s ESG 2021 Midyear Outlook report also predicted US$1 trillion in ESG exchange-traded fund assets by 2025, with the ESG debt market growing from US$3 trillion to US$11 trillion over the same period.
“ESG ETF cumulative assets reached around $225 billion in 2020 accounting for almost 15% of global ETF asset growth that year. Though Europe has dominated ESG ETFs, US products have supported the next wave of organic expansion,” said Adeline Diab, Head of ESG and Thematic Investing EMEA & APAC at Bloomberg Intelligence.
Separately, Refinitiv’s Sustainable Finance Review for the first half of 2021 revealed a 76% increase in the issuance of sustainable bonds, totalling US$551.6 billion, compared with the first half of 2020. Green bond issuance trebled to US$259.3 billion in the first six months of this year, while social bond issuance totalled US$142.4 billion, more than doubling first half 2020 levels. The report also noted steep rises in equity capital markets and M&A activity for sustainable companies, and a trebling in sustainable syndicated lending versus the first half of 2020.