Environmental, social and governance (ESG) factors were once considered “nice to have” for investors who wanted to align their portfolios with their values. Today, we think incorporating them is essential for generating outperformance.
The importance of ESG today has a lot to do with changing preferences among consumers and employees, as well as increased scrutiny from governments and regulators. But there’s more to it than that. We think long-term economic viability and investment success increasingly depend on sustainable practices. We’ve seen the devastation that climate change can have on ecosystems and societies. We’ve seen what social and racial injustice can do to communities and the economies that support them. These are financially material issues, and we believe investors should be factoring them into their decisions.
A decade ago, it was common to assume one would have to sacrifice some return potential in exchange for having a social or environmental impact. But innovation, technological advances and an influx of capital into ESG strategies have since made it possible to do both.
Solar and offshore wind energy prices, for example, have declined sharply over the last decade, and investment in renewable energy has increased sharply; in 2018 it hit $280billion, which was triple the amount of investment in coal- and gas-fired energy generation that year. The Global Investment Research division of Goldman Sachs estimates that renewable power will be the largest area of spending in the energy industry in 2021, surpassing upstream oil and gas development for the first time.
And we believe such opportunities will increase. Consider for example, the innovation that has brought down the cost of long-term battery storage facilities for solar- and wind-generated electricity, making them increasingly viable investments, particularly for private capital.
