The pace of green investments is slowing down but the ESG ETF mass rises to 600 billion
“The last two years have shone the spotlight of public opinion on the limits, the lights and the shadows of responsible investments, spreading the perception of a reduction of enthusiasm for the ESG world. Furthermore, some investors have begun to question the merit of the environmental and social responsibility of their investments, thanks to the extraordinary performance of the fossil fuel and defense industries and the anti-ESG movement in the US, which has come to influence some investment giants global. In my opinion, these are doubts also fueled by excessive media exposure of an ecosystem that was not yet, and I would say inevitably, mature from a regulatory and technical point of view”.
This is what we read in an analysis of Michele Morra, Portfolio Manager at Moneyfarm. “The truth is that the ESG world has continued to grow and evolve and, despite a slowdown compared to the pace of 2020-2021, to attract the interest of investors. In fact, Bloomberg data says that on a global level the masses invested in ESG ETFs went from 7.2% at the end of 2022 to 7.4% at the end of 2023for a total of 600 billion dollars in assets in 2023 compared to around 100 billion in 2019. Therefore, a slowdown yes, but certainly not a U-turn”, continues Morra.
“The data on the preferences of the Moneyfarm customer base confirms this trend. Our latest survey showed that the masses invested in ESG portfolios in 2023 achieved growth of +30% compared to 2022, reaching 16% of the total. From the start of the marketing of socially responsible portfolios in the second half of 2021 to today, they have continued to grow by double digits, demonstrating how, for Moneyfarm customers, this type of investment is not a passing trend, but an opportunity to seek long-term returns, considering their sustainability preferences. Furthermore – continues Morra – the ESG portfolios opened on Moneyfarm in 2023 were 37% of the total, up compared to 2022 (35%), further confirming the fact that we are not recording any signs of a reduction in investor enthusiasm”.
Sustainability and ESG: the identikit of those who invest
“From a demographic point of view, it is curious to note a decidedly higher interest in socially responsible investments among our clients: in Italy, 34% of women have opened at least one ESG wallet today, compared to 24.5% of men. And, again in Italy – continues the Moneyfarm manager – it is equally interesting to contradict the common thought that they would be the new generations who are most sensitive to the issue of sustainability, at least from an investment point of view, since it is among the Baby Boomers (56-74 year age group) that we see higher adoption than any other age group (32% versus 25% of Millennials and 27% of Gen Z)”.
“To these quantitative considerations must be added the qualitative evolution of the ESG panorama, which has continued to progress with an active and critical approach on various fronts. From a regulatory point of view, especially in Europe, efforts have been made to practical solutions to problems such as lack of data, the lack of uniformity of investment techniques or greenwashing. For example – explains Morra – to try to extend reporting obligations on sustainability to as many companies as possible, starting from 2025 the number of companies subject to CSRD regulation (Corporate Sustainability Reporting Directive); at the same time, the spectrum of activities regulated by the European Taxonomy is also expanding, which aims to standardize the definitions of sustainable environmental activities. Furthermore, to try to combat greenwashing, with the entry into force of the SFDR (Sustainability Financial Disclosure Regulation), the definitions of ESG investments have begun to be standardized, providing greater transparency to investors on the type of strategy adopted by the manager”.
“It should be remembered that investment techniques have also made important progress, with the launch of innovative strategies focused on asset classes that were neglected in the past, such as government bonds. It remains essential for managers to constantly update portfolios with the latest ESG techniques available on the market: during 2023, for example, in the face of an expansion of the offer and a improvement in the quality of ETFs on thematic bonds, instruments that invest in Green Bonds and in bonds issued by Economic Development Banks have also been included in Moneyfarm portfolios, in some cases up to 10% of the portfolio. The evolution of investment techniques can not only improve the profile of sustainability of a portfoliobut also mitigate exposure to idiosyncratic and factor risks”, underlines the Moneyfarm Portfolio Manager.
“From a performance perspective, Moneyfarm’s ESG model portfolios generated 4.7% to 13.9% in 2023, depending on risk level, swithout significantly deviating from performance of classic wallets. The ESG ETFs that we use to invest in the S&P 500 outperformed the generic index, while for other geographies, such as Emerging Countries, the stock performance, although positive, was lower than its classic counterpart. But beyond the fluctuations that occur within a single year, determined mainly by contingent factors, investors should focus on the long-term prospects of this type of investment and on satisfying their sustainability needs”, highlights Morra “In any case, if we look to 2024, it is true that a possible escalation of geopolitical risks could have an impact on the energy market and therefore favor sectors and raw materials excluded from some socially responsible investments, but it is also true – concludes the Moneyfarm Portfolio Manager – that the dynamics of interest rates can generate a favorable environment for this type of investment, which suffer greater losses than broad indices when rates rise, but tend to benefit more when monetary tightening eases.”