Message from America: Pandemic pushes ESG and some predict US election outcomes could too

Are ESG investments becoming the de facto rule in the US?


Liz Skinner

Some large financial advice providers in the US are beginning to throw their full support behind the integration of responsible investing concepts into client portfolios, finally eroding decades of false conclusions, such as ESG fund investors have to forego investment performance.

Most notably, UBS said in September that sustainable assets – of which it manages $488bn – are officially the firm’s preferred solution for private clients investing globally. It pointed out that major sustainable indices have performed better than traditional investments since the pandemic has put the interconnected nature of societies and industries to the front of investors’ minds.

“Covid-19 has put the exclamation point on one of the most important shifts in financial services in a generation,” said Tom Naratil, co-president of UBS global wealth management and president of UBS Americas.

Researchers agree that the pandemic has been beneficial to pushing ESG to the realm of ‘must-have’ for adviser planning solutions.

Covid-19 has spurred more interest in ESG investing as global assets are expected to surge to $53trn by 2022, according to a recent Celent analysis. William Trout, author of that analysis and Celent’s head of wealth management, said this ESG tipping point means no wealth managers should still be looking at sustainable investing as an asset class or portfolio strategy, rather, ESG investing is the new lens that determines how all investment decisions will be made.

“In the past, the industry was always interested if sustainable investments outperform traditional investments,” Trout said. “Today, the narrative for advisers has changed to: ‘How do I respond to this new world where ESG investments are the de facto rule?’”

Moving forward, Trout said advisers should tap modern portfolio management tools via turnkey asset management platforms to customise clients’ portfolios based on an ESG criteria.

Advisers should also note that fractional shares allow investors with limited wealth to get involved with ESG investing, according to Trout.

The democratisation enabled by fractional shares also means that multiple strategies can be economically packaged within a single account, he said.

Polls predict sunny days

Meanwhile, the spectre of the US elections next month hangs over every industry. Low key confidence that Democratic challenger Joe Biden is polling ahead of Donald Trump has solar energy companies experiencing a burst of momentum.

Among exchange-traded funds targeting specific sectors and industries, Invesco Solar ETF (TAN) has become one of the hottest funds of 2020, up more than 143% from the start of the year.

The ETF, which holds a concentrated portfolio of solar energy companies, is coming off an impressive 66.5% gain last year. According to CFRA, the ETF has $2bn in assets, up from $1.6bn a month ago and $630m in June.

Todd Rosenbluth, director of mutual fund and ETF research at CFRA, said investors are betting that “if the Biden administration comes in, their efforts to return the US to the Paris climate accord and a focus on fighting climate change will be a driver for wind, solar and alternative energy demand.”

Other examples of thematic ETFs rallying this year include iShares Global Clean Energy (ICLN), Invesco WilderHill Clean Energy (PBW), ALPS Clean Energy (ACES) and SPDR Kensho Clean Power (CNRG).

ICLN, which is up more than 80% this year and gained nearly 45% last year, has grown to $2bn from $1.5bn a month ago and $721m in June.

With the election about three weeks away and Biden leading in most major polls, investors are starting to position portfolios for an administration that will likely throw fiscal and policy support behind more environmental causes.

“The infrastructure and green trade is a very ‘blue wave’ concept,” said Yousef Abbasi, global market strategist at StoneX, referring to a situation in which the Democrats take control of both the White House and Congress. “The trade is very much indicating that someone believes that we’ll get the push for a Democratic Senate.”

Carbon pricing

A group of powerful financial firms including Morgan Stanley and JP Morgan Chase & Co. were among those that said last month that the US government should start making businesses pay for their greenhouse gas emissions to help combat global warming.

Climate change poses a significant risk to the financial system and regulators must “move urgently and decisively,” the group said in a report that was signed by executives from the three firms and more than two dozen other global businesses, investors and nonprofit organizations.

The document was produced by a committee that advises the US Commodity Futures Trading Commission on climate-related market risks. The panel is sponsored by Rostin Behnam, a Democratic commissioner at the CFTC.

Extreme weather events, previewed by those the US has seen all summer, “pose significant challenges to our financial system and our ability to sustain long-term economic growth,” Behnam said in a statement.

The report wasn’t voted on by commissioners at the Republican-led agency. CFTC Chairman Heath Tarbert said in a statement that he appreciated Behnam’s “leadership on convening various private sector perspectives,” but cautioned against moving too quickly.

Calls by corporate executives for a tougher government stance have had little success during the Trump administration as officials have reversed policies implemented to cut emissions and the US is withdrawing from the 2015 Paris Agreement on climate change.

This report includes a series of non-binding recommendations that could serve as a blueprint if Biden wins the White House.

Liz Skinner is special projects editor for InvestmentNews in the US.

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