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ESG Investing: The Top 5 Drivers, According to Investors

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ESG Investing

ESG Investing

This infographic is available as a poster.

ESG Investing: The Top Five Drivers

Today, environmental, social and governance (ESG) investing has never been more popular, surpassing record levels seen in 2020, according to Google Trends.

By 2025, ESG investing is projected to reach $53 trillion in assets globally—roughly equal to a third of all investment assets under management. It raises an important question: why are people choosing to use an ESG strategy?

To answer this question, the above Markets in a Minute chart from New York Life Investments looks at the top drivers behind ESG investing, based on a survey of 2,800 Chartered Financial Analyst (CFA) investment professionals.

What is ESG Investing?

ESG investing refers to assets that are selected according to their environmental, social, and governance factors.

These include everything from carbon intensity and gender representation, to executive pay. Often, these variables are analyzed through sources such as sustainability reports or government data, among others.

Broadly speaking, ESG investing strategies can fall into four main categories:

  • Values & Screening: Determines sectors, companies, and activities that are included or excluded from investment such as fossil fuels. This can also be based on investors’ values.
  • Integration: Identifies the risks and opportunities of ESG factors on companies. Typically more complex than screening approaches.
  • Thematic: Focuses on structural themes in ESG such as women’s leadership or smart cities.
  • Impact: Specific goals are designed to be met, such as companies that are working towards the UN Sustainable Development Goals.

Given its rapid rise, here are the most influential reasons why investors—retail and institutional alike—are paying attention to this trend.

The Top 5 Drivers of ESG Investing

Simply put, risk management and client demand were the most prominent factors behind ESG investing in 2020.

Driver of ESG Investing20172020
To help manage investment risks65%64%
Clients/investors demand it45%59%
It's our fiduciary duty36%43%
My firm derives reputational benefits32%41%
To improve financial returnsN/A*35%

Based on a March 2020 survey of 2,800 CFA institute members who were asked: ‘Why do you or your organization take ESG issues into consideration in your investment analysis/decision? (Select all that apply)
*No data available in 2017

Fiduciary duty ranked third highest, impacting the decisions of 43% of investment professionals.

Here, fiduciary duty is when an investment professional acts in the best interest of a client. From Brazil to the U.S., over 500 socially responsible regulations have been enforced globally, including corporate disclosures and pension fund regulations.

Additionally, improving financial returns was a primary reason for 35% of the respondents. In 2020, for example, 22 out of 23 ESG index funds outperformed their comparable non-ESG index.

ESG Investing: Age is Just a Number

Who is investing in ESG?

Across age groups, people were motivated by higher risk-adjusted returns and values to varying degrees. For instance, 42% of investors between 25-34 expected higher risk-adjusted returns from ESG compared to 16% of investors aged 55-64.

At the same time, 47% of investors across all age groups wanted to invest in ESG to express their personal values or focus on companies that were making a positive contribution to society and the climate.

Reason for Investing in ESG25-3435-4445-5455-6465+
To realize higher risk-adjusted returns42%39%18%16%14%
To express personal values or invest in companies with a positive societal/environmental impact44%41%54%50%50%
Both14%19%28%34%35%

Source: CFA (Apr, 2020)

Meanwhile, roughly a quarter of investors said that both higher risk-adjusted returns and sustainable impact underscore their interest in ESG.

Reason for Investing in ESGOverall
To realize higher risk-adjusted returns29%
To express personal values or invest in companies with a positive societal/environmental impact47%
Both24%

Source: CFA (Apr, 2020)

In 2020, 10% of retail investors invested in ESG. By comparison, interest in ESG is much higher. Almost 70% of individual investors expressed interest in these strategies.

Investment in ESGRetail InvestorsInstitutional Investors
Currently invest in ESG10%19%
Show interest in ESG69%76%

Source: CFA (Apr, 2020)

Perhaps one of the most interesting takeaways from this study, however, is the wide gap between interest and investment in ESG. One factor behind this gap could be due to the fact that just 41% of advisors have spoken to clients about ESG investing, research shows.

However, underlying perspectives on performance, demand, and personal preferences show that ESG may further cement its way into not only the investment dialogue, but investors’ portfolios.

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Markets in a Minute

Visualizing the History of U.S. Inflation Over 100 Years

Is inflation getting higher? In this infographic we explore how inflation rates have evolved over the last century, putting current numbers into context.

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Inflation

This infographic is available as a poster.

Visualizing the History of U.S. Inflation Over 100 Years

Is inflation rising?

The consumer price index (CPI), an index used as a proxy for inflation in consumer prices, offers some answers. In 2020, inflation dropped to 1.4%, the lowest rate since 2015. By comparison, inflation sits around 2.5% as of June 2021.

For context, recent numbers are just above rates seen in 2019, which were 2.3%. Given how the economic shock of COVID-19 depressed prices, rising price levels make sense. However, other variables, such as a growing money supply and rising raw materials costs, could factor into rising inflation.

To show current price levels in context, this Markets in a Minute chart from New York Life Investments shows the history of inflation over 100 years.

U.S. Inflation: Early History

Between the founding of the U.S. in 1776 to the year 1914, one thing was for sure—wartime periods were met with high inflation.

At the time, the U.S. operated under a classical Gold Standard regime, with the dollar’s value tied to gold. During the Civil War and World War I, the U.S. went off the Gold Standard in order to print money and finance the war. When this occurred, it triggered inflationary episodes, with prices rising upwards of 20% in 1918.

YearInflation Rate*
19141.0%
19152.0%
191612.6%
191718.1%
191820.4%
191914.6%
19202.7%
1921-10.8%
1922-2.3%
19232.4%
19240%
19253.5%
1926-1.1%
1927-2.3%
1928-1.2%
19290.6%
1930-6.4%
1931-9.3%
1932-10.3%
19330.8%
19341.5%
19353.0%
19361.5%
19372.9%
1938-2.8%
19390.0%
19400.7%
19419.9%
19429.0%
19433.0%
19442.3%
19452.3%
194618.1%
19478.8%
19483.0%
1949-2.1%
19505.9%
19516.0%
19520.8%
19530.8%
1954-0.7%
19550.4%
19563.0%
19572.9%
19581.8%
19591.7%
19601.4%
19610.7%
19621.3%
19631.6%
19641.0%
19651.9%
19663.5%
19673.0%
19684.7%
19696.2%
19705.6%
19713.3%
19723.4%
19738.7%
197412.3%
19756.9%
19764.9%
19776.7%
19789.0%
197913.3%
198012.5%
19818.9%
19823.8%
19833.8%
19844.0%
19853.8%
19861.1%
19874.4%
19884.4%
19894.7%
19906.1%
19913.1%
19922.9%
19932.8%
19942.7%
19952.5%
19963.3%
19971.7%
19981.6%
19992.7%
20003.4%
20011.6%
20022.4%
20031.9%
20043.3%
20053.4%
20062.5%
20074.1%
20080.1%
20092.7%
20101.5%
20113.0%
20121.7%
20131.5%
20140.8%
20150.7%
20162.1%
20172.1%
20181.9%
20192.3%
20201.4%
20212.5%

Source: Macrotrends (June, 2021)
*As measured by the Consumer Price Index (CPI)

However, when the government returned to a modified Gold Standard, deflationary periods followed, leading prices to effectively stabilize, on average, leading up to World War II.

The Move to Bretton Woods

Like post-World War I, the Great Depression of the 1930s coincided with deflationary pressures on prices. Due to the rigidity of the monetary system at the time, countries had difficulty increasing money supply to help boost their economy. Many countries exited the Gold Standard during this time, and by 1933 the U.S. abandoned it completely.

A decade later, with the Bretton Woods Agreement in 1944, global currency exchange values pegged to the dollar, while the dollar was pegged to gold. The U.S. held the majority of gold reserves, and the global reserve currency transitioned from the sterling pound to the dollar.

1970’s Regime Change

By 1971, the ability for gold to cover the supply of U.S. dollars in circulation became an increasing concern.

Leading up to this point, a surplus of money supply was created due to military expenses, foreign aid, and others. In response, President Richard Nixon abandoned the Bretton Woods Agreement in 1971 for a floating exchange, known as the “Nixon shock”. Under a floating exchange regime, rates fluctuate based on supply and demand relative to other currencies.

A few years later, oil shocks of 1973 and 1974 led inflation to soar past 12%. By 1979, inflation surged in excess of 13%.

The Volcker Era

In 1979, Federal Reserve Chair Paul Volcker was sworn in, and he introduced stark changes to combat inflation that differed from previous regimes.

Instead of managing inflation through interest rates, which the Federal Reserve had done previously, inflation would be managed through controlling the money supply. If the money supply was limited, this would cause interest rates to increase.

While interest rates jumped to 20% in 1980, by 1983 inflation dropped below 4% as the economy recovered from the recession of 1982, and oil prices rose more moderately. Over the last four decades, inflation levels have remained relatively stable since the measures of the Volcker era were put in place.

Fluctuating Prices Over History

Throughout U.S. history. there have been periods of high inflation.

As the chart below illustrates, at least four distinct periods of high inflation have emerged between 1800 and 2010. The GDP deflator measurement shown accounts for the price change of all of an economy’s goods and services, as opposed to the CPI index which is a fixed basket of goods.

It is measured as GDP Price Deflator = (Nominal GDP ÷ Real GDP) × 100.
Inflation using GDP Price Deflator

According to this measure, inflation hit its highest levels in the 1910s, averaging nearly 8% annually over the decade. Between 1914 and 1918 money supply doubled to finance war efforts, compared to a 25% increase in GDP during this period.

U.S. Inflation: Present Day

As the U.S. economy reopens, consumer demand has strengthened.

Meanwhile, supply bottlenecks, from semiconductor chips to lumber, are causing strains on automotive and tech industries. While this points towards increasing inflation, some suggest that it may be temporary, as prices were depressed in 2020.

At the same time, the Federal Reserve is following an “average inflation targeting” regime, which means that if a previous inflation shortfall occurred in the previous year, it would allow for higher inflationary periods to make up for them. As the last decade has been characterized by low inflation and low interest rates, any prolonged period of inflation will likely have pronounced effects on investors and financial markets.

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How Rising Treasury Yields Impact Your Portfolio

Treasury yields have climbed to pre-pandemic levels. Here’s why they are important, and which investments may go up or down as yields rise.

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Treasury Yields

This infographic is available as a poster.

How Rising Treasury Yields Impact Your Portfolio

Since the start of 2021, the yield on the U.S. 10-year Treasury note has climbed to pre-pandemic levels. But what exactly does this mean, and how could it impact your portfolio?

In this Markets in a Minute from New York Life Investments, we explain why Treasury yields are important and which investments may go up or down when yields are rising.

What are Treasury Yields?

Treasury yields are the total amount of money you earn from U.S. debt securities, such as bonds and T-bills. Yields depend on both the security’s price, relative to its face value, and its “coupon” or interest payment.

The 10-year yield is important because it is closely-watched indication of market sentiment. Here’s what leads to changing Treasury yields:

  1. When investors expect the market to drop, they look for safer investments.
  2. Due to higher bond demand, prices rise.
  3. This lowers their yield, as bonds become more expensive than they were before.

The opposite occurs when the market is bullish.

  1. When investors expect the market to rise, they look for riskier investments.
  2. Due to less bond demand, prices drop.
  3. This raises their yield, as bonds become more cost effective.
    1. Currently, Treasury yields are in the latter scenario because investors are confident in a sustained recovery as vaccines are rolled out and the economy reopens.

      Investments That May Go Up During Rising Yields

      Rising yields can have a number of knock-on effects in the market. Here are the investments that could increase in value when yields are going up.

      InvestmentWhy could returns potentially increase?
      U.S. dollarRising yields attract income-seeking investors, who must purchase U.S. debt in U.S. dollars
      Savings accountsIf the economy is growing at a rate that may lead to hyperinflation, the central bank may raise interest rates 
      REITsWhile rising rates pose challenges, economic growth typically translates into a higher level of real estate demand
      Cyclical stocksStocks that move with the economy, like banks, tend to do well during economic recoveries

      Cyclical stocks, such as banks, travel, and energy, may all benefit from an economic recovery. This is particularly true for banks if the economy is growing at a rate that exceeds inflation targets, as the central bank may raise interest rates. In turn, this allows banks to earn a higher profit margin because they can charge a higher rate on their loans.

      While it is commonly said that real estate investment trusts (REITs) underperform during rising interest rates, the data tells a different story. In four of six periods of sustained rising yields, REITs earned positive returns—and they outperformed stocks in half of them.

      REIT Performance During Rising Treasury Yields

      Source: S&P Dow Jones Indices

      Rising rates do pose challenges, including higher borrowing costs and lower property values.

      However, it’s evident that rising rates also have a positive influence on REITs. For instance, rising rates are typically associated with economic growth, which translates to higher real estate demand and higher occupancy rates. This means REITs can see increased earnings and dividends.

      Investments That May Go Down During Rising Yields

      On the flip side, there are some investments that could decrease in value when yields climb.

      InvestmentWhy could returns potentially decrease?
      BondsTo remain competitive, newly issued bonds offer higher interest rates—making existing bonds less attractive
      Dividend-paying stocksRising rates give an edge to newly issued bonds, creating a historically safer alternative for income-seeking investors
      GoldAs a safe haven asset, gold is less desirable during market optimism
      Some growth stocksRising interest rates make borrowing more expensive, which may slow company growth

      Existing bonds will likely see declining performance, with higher volatility among long-term government and corporate bonds. Short-term bonds typically see smaller drops. This is because they have less interest rate risk: there’s a smaller probability that interest rates will rise before a short-term bond’s maturity, and they have fewer interest payments that could be affected by rising rates.

      Growth stocks, such as those in the technology sector, may also see weaker performance. In fact, value stocks have been outperforming growth stocks since the fourth quarter of 2020, a significant shift from growth’s strong historical performance in recent years.

      U.S. Treasury Yields: One Part of the Picture

      In addition to being a barometer for investor confidence, Treasury yields can have an important impact on your portfolio.

      However, investment performance can vary depending on a number of other economic factors such as inflation and interest rate levels. For example, climbing inflation could lead to higher gold prices, since gold is seen as an inflationary hedge. You may want to consider the full economic picture when you are reviewing your portfolio.

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