Just where will ESG be in a few years beyond simply being bigger?

Bloomberg Intelligence recently estimated that the ESG push will be a US$50 trillion business, more than twice the size of US GDP today (US$23 trillion).

The figure might still seem impossible to all but the most ardent of ESG advocates. But ESG assets were US$35 trillion in 2020, up from $30.6 trillion in 2018 and $22.8 trillion in 2016.

This assumption was predicated upon a 15% growth rate which is only half the pace of the last five years.

The market for ESG focused ETFs could be $1 trillion alone and ESG bond markets were projected to be $11 trillion.

 

Will ESG really be that big by 2025?

Saxo Bank‘s chief investment officer Steen Jakobsen says while ESG is the biggest political project ever, there is one reason why failure is not an option – namely, the political capital behind it.

Jakobsen pointed to the example of the Euro currency, stating even though it was born without a proper foundation (in the form of a fiscal union), it survived the last three decades, purely because of the political capital.

“The ESG and green agenda will prevail, if only because it will have unprecedented political will and capital behind it,” he said. 

“It is the biggest ‘whatever it takes’ commitment and it’s global too.”

 

Inflation and lower interest rates

But Jakobsen says investors need to understand and act upon he consequences of the ESG transformation due to take place by 2025.

“The ESG and green transformation is simply the single largest policy bet ever undertaken, and the main consequences will be inflation and ever lower real rates,” he said.

“Inflation in this case will be a function of the physical world not able to deliver the supply relative to the quantity of money and demand, and negative real rates tell us the future is one of low real growth through low productivity growth.”

So what will be the asset classes that will do well?

“There are two major assets classes that will do well under this regime: Government-sanctioned assets, and assets with price discovery,” Jakobsen said.

“This means green and, ironically, commodities have the best odds of producing long-term excess returns.”

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