Most ESG-focused investors subscribe to the idea of a triple bottom line—or looking at social, environmental, and financial returns. In other words, they may be willing to accept lower financial returns as long as there are attractive social and environmental returns. However, the measurement of these returns is still in a state of flux.
The lack of standards is an oft-cited barrier to sustainable investing. Fortunately, these standards are emerging, and it’s becoming easier to measure the impact of ESG factors. And, at the same time, regulators are pushing companies to be more transparent about ESG risk factors, potentially increasing the risk premium of non-ESG investments.
Some behavioral studies even suggest that investors are not only willing to trade off financial outcomes for social outcomes but desire these trade-offs. Like giving money to charity, accepting lower financial returns may be seen as a form of altruism for some investors, further decreasing the importance of financial performance to ESG adoption rates.
The current data seem to support these notions. Despite relatively modest alpha in 2021, ESG investments had record net inflows during the first half of the year, according to ETFGI, an independent research and consultancy. In aggregate, the firm found ESG assets rose 51.6% during the first half from $193 billion in 2020 to $293 billion by June 30, 2021.