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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 Housing Prices and Inflation

Is there a correlation between housing prices and inflation? In this graphic, we chart their relationship over three decades.

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Housing Prices and Inflation

This infographic is available as a poster.

Visualizing Housing Prices and Inflation

Do housing prices feed into inflation?

Often, rising housing prices lead to higher rents, and rent contributes to inflation. In fact, shelter makes up over 30% of the consumer price index (CPI), a common inflation measure.

Still, the relationship is not 1:1. Historical data has shown a lag between housing prices and the CPI, while other factors—such as input prices and demand—impact their relationship.

This Markets in a Minute from New York Life Investments charts housing prices and inflation over the last 30 years.

Housing Prices and Inflation in Context

In the first quarter of 2022, U.S. housing prices rose at the fastest rate in over three decades—jumping over 18% in the last year.

Not only that, housing price growth has been at a double-digit annualized pace for each of the last six quarters, going back to Q4 2020.

Rising construction input costs have been a key factor. Combined labor and material costs increased 3% in 2019, in the line with the historical average. By 2021, these costs increased 10%, driven by supply-chain disruptions. Low interest rates also boosted demand.

Below we look at the 20 highest annual changes in the price index by quarter since 1992. Data is based on the Federal Housing Finance Agency’s House Price Index.

RankYearQuarterHousing Price Index Change
(Previous 4 Quarters)
12022118.7%
22021318.6%
32021217.8%
42021417.7%
52021113.1%
62020411.2%
72005310.6%
82005210.6%
92005110.5%
102005410.2%
112004410.2%
12200439.9%
13200429.3%
14200619.2%
15200418.3%
16202038.2%
17200347.8%
18200317.7%
19200247.6%
20200337.6%

Seasonally-adjusted purchase-only index

Since CPI is a cost-of-living index, it serves to track the price of goods and services people consume. That’s why an increase in housing prices, in theory, can impact inflation.

Like the growth in housing price increases, inflation has hit multi-decade highs in 2022. Below, we rank the years with the highest inflation since 1992.

RankYearCPI Annual Percent Change
12022*8.0%
220214.7%
319914.2%
420083.8%
520003.4%
620053.4%
720063.2%
820113.2%
919923.0%
1019933.0%
1119962.9%
1220072.9%
1319952.8%
1420012.8%
1520042.7%
1619942.6%
1720182.4%
1819972.3%
1920032.3%
2019992.2%

*An estimate for 2022 is based on the change in the CPI from first quarter 2021 to first quarter 2022.
Source: Bureau of Labor Statistics (2022)

Of course, higher housing prices are not the only factor contributing to higher inflation. Take 1991. Inflation reached 4.2% driven by higher energy costs due to conflicts in the Middle East. During this time, housing prices saw relatively slower growth.

Also consider the 2008 Global Financial Crisis, where inflation hit 3.8%. Housing prices increased at double-digit speed a few years earlier, eventually hitting a peak in 2007. Meanwhile, the price of West Texas Intermediate crude oil soared from $70 a barrel in 2007 to $140 by July 2008, likely having a more immediate affect on inflation.

What’s Ahead

How will rising housing prices contribute to inflation in the near future?

First, the shelter component of the CPI looks at data from both renter-occupied units and owner-occupied units. As mentioned above, rising housing costs often lead to higher rent inflation.

Over 2022, the pace of rent inflation is anticipated to accelerate 3.4 percentage points relative to the pre-pandemic five-year average, based on analysis from the San Fransisco Fed. As a result, this is forecasted to increase CPI by 1.1 percentage points (31% of 3.4 percentage points). Given their historical relationship, accelerating rent inflation could materialize in higher CPI.

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Identifying Trends With the Relative Strength Index

When is the S&P 500 Index considered overbought or oversold? The relative strength index may offer some answers to identifying market trends.

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Identifying Market Trends: The Relative Strength Index

What happens when the S&P 500 Index enters oversold territory? Does the market reverse, or continue on this trend?

A widely-used momentum indicator, the relative strength index (RSI) may offer some insight. The RSI is an indicator that may show when a stock or index is overbought or oversold during a specific period of time, indicating a potential buying opportunity.

This Markets in a Minute from New York Life Investments looks at the RSI of the S&P 500 Index over the last three decades to show how the market performed after different periods of overbought or oversold conditions

What is the Relative Strength Index?

The RSI measures the scale of price movements of a stock or index. In short, the RSI is used to calculate the average gains of a stock divided by the average losses over a certain time period. These are then tracked across a scale of 0 to 100. Broadly speaking, a stock is considered overbought if it reads 70 or above and it is considered oversold if it is 30 or below.

For example, when the S&P 500 Index has a RSI of 85, an investor may consider it overbought and sell their shares. Conversely, if the RSI hits 25, an investor may buy the S&P 500 thinking the market will bounce back.

The RSI is often used with other indicators to identify market trends.

The Relative Strength Index and S&P 500 Returns

Below, we show the 12-month returns of the S&P 500 Index after key ‘overbought’ or ‘oversold’ conditions in the market as indicated by the RSI:

DateRSIShiller PE Ratio*S&P 500 Index 12-Month Return
Jul 15 200220239.4%
Dec 4 200673274.5%
Oct 13 200815167.3%
Feb 7 201175231.9%
May 13 2013752316.1%
Jan 8 20188933-7.2%
Mar 16 2020222566.3%
May 3 202172370.0%

*Measured by the average inflation-adjusted earnings of the S&P over 10 years

As the above table shows, following each period of extremely oversold territory in the RSI, the S&P 500 Index had positive returns.

In fact, the S&P 500 Index had the strongest one-year returns following the COVID-19 crisis of March 2020, with over 66% 12-month returns. During the time of extreme fear, the RSI sank to deeply oversold territory before sharply rebounding.

Interestingly, following periods of extremely overbought conditions in the market there was a range of positive and negative performance. Most recently, before the peak of the last cycle in 2021, the S&P 500 Index spent roughly 9 months in ‘overbought’ territory before declining into 2022.

The Relative Strength Index in 2022

With the economy in uncertain territory, how does the RSI look today?

In early June, following a bleak consumer sentiment announcement, the RSI fell to 30, hovering on oversold territory. Since then, it has risen closer to 40 as consumer sentiment and perspectives on economic conditions have slightly improved.

However, whether or not the RSI will continue on this uptrend remains to be seen.

For the remainder of 2022, market sentiment, which may be shaped by the coming GDP and inflation figures, could push RSI into oversold territory once again. As a bright spot this may be good news—reinforcing a turning point in the market.

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