Environmental, social and governance investing is setting up for another big year.
After an "extraordinary year" in 2020, ESG-themed investments should continue their hot streak as interest in sustainable and socially responsible investing grows, MSCI's Linda-Eling Lee told CNBC's "ETF Edge" on Monday.
"We were not necessarily expecting this to be the year where ESG really takes off, but clearly it has attracted a lot of attention, both in terms of the companies and what they're doing from an ESG perspective [and] certainly from a flows point of view," said Lee, who is global head of research for MSCI's ESG Research group.
Topping Lee's list of ESG trends to watch in 2021 is climate change.
"Despite all the lockdowns that we've had this year, we're still on track for a world that is going to be too warm to sustain life as we know it, according to climate science," Lee said. "You're going to see lots more investors really shifting capital towards less carbon-intensive assets."
That may bring some clarity to what Main Management's Kim Arthur called "the big gorilla in the room": finding the best way to invest in the range of different ESG-based funds on the market.
"We subscribe to multiple databases. There is no easy button to screen for ESG," Arthur, his firm's president and CEO, said in the same "ETF Edge" interview. "What ends up happening is since there is no standard definition, each client that comes in is almost a bumper sticker."
Those "bumper stickers" could be clients who prefer to be exclusionary — no casino operators or tobacco companies, for example — or those simply looking for names considered to be best in class, Arthur said.
That also contributes to the varying performance of some of the market's top ESG-based exchange-traded funds. Vanguard's ESG U.S. Stock ETF (ESGV), the market's second largest by assets, is up more than 22% year to date, while iShares ESG MSCI USA Leaders ETF (SUSL) has risen just 14.5%, a notable difference.
All in all, "it's not easy" to be a money manager in an ESG-focused investment landscape, Arthur said.
"I think that's one of the reasons that scalability has been a little more difficult," he said. "Because if I go to my clients … that bumper sticker is sort of what they are looking for and it's very unique and very individualized right now."
Jon Hale, head of sustainability research for the Americas at Morningstar, suggested using ESG as an add-on to other strategies.
"Different ESG funds also have different exclusions that they use, so they can be quite different," he said in the same "ETF Edge" interview. "I think the best way to think about it is that you can add ESG onto a number of different investment styles and approaches."