ESG Demand in the Early Stages

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Over the past decade, interest in environmental, social, and governance (ESG) investing has grown dramatically. Investor inquiries about sustainable and ESG strategies have overtaken inquiries about more traditional investment options. At year-end 2020, the Morningstar platform offered more than 400 sustainable investment solutions. This number quickly grew to 437 by the second quarter of 2021. Compare that to a decade ago, when there were only a handful of options available.

Google searches. Interest in sustainability is well illustrated by Figure 1. It shows the popularity of Google searches for the term “ESG” from 2004 through 2021. The data shows a significant increase in these searches over the past few years. In 2022, we expect this to continue. Skepticism about ESG investments will continue to give way to acceptance and a greater understanding of the benefits these products can provide to investors.

Figure 1. Google Searches for the Term “ESG”

Source: Google Trends

Risks and return. The recent trends show that investors are ready to tackle climate challenges. Many individuals are beginning to realize that inaction will lead to systemic risks. Habitat decline, social division, and inequality pose significant risks to long-term portfolio returns. These issues lie at the heart of ESG investing. If we fail to address them, the risks will continue to compound. The likely result will be a volatile investment environment.

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