ESG Trends and Their Impact on Investment Strategies and Market Liquidity

How ESG Investing Impacts Market Liquidity

77% of millennials and 73% of Gen Z make career and consumption decisions that work towards minimising their impact on the environment. They even urge businesses to actively support consumers in making sustainable purchase decisions. In fact, 34% of recommerce (buying and selling of pre-owned, refurbished or returned products) consumers attribute their choices to sustainability benefits. Given that these are large segments of your customer base, catering to their preferences is critical as a broker.

Multi-Dimensional Sustainability Under Focus

Did you know that Environmental, Social and Governance (ESG) initiatives are not limited to a clean environment but also includes equitable opportunities? ESG investing has led to the improvement of corporate diversity and inclusion. According to a World Economic Forum survey, 79% of companies across 146 countries were focused on bridging the gender gap in the workforce in 2023, with Europe emerging as the region with the highest gender parity.

The momentum for ESG investments has been building for a while. Although clean energy stocks have underperformed the S&P 500 since the Russia-Ukraine war began, the Institute of Energy Economics and Financial Analysis highlighted in a June 2024 report that fossil fuels had “not outperformed” clean energy over the past decade.

Regulators worldwide are pushing for transparent ESG reporting and robust data validation techniques to lower climate risks. Efforts to standardise ESG metrics and reporting frameworks are underway globally. These are expected to further improve asset comparability and facilitate investment decisions. The EU and several Asian nations have embedded sustainability policies into the mainstream. The US, however, is still in the early stages. While the SEC mandates climate disclosure, the requirement is yet to be stringently executed.

Source: S&P Global

ESG Considerations: Gaining Ground in Business Strategies

Trading consciously allows traders to participate in creating a sustainable future while generating superior financial returns. This creates a feel-good factor about their investment choices.

For enterprises, ESG reporting has proven beneficial in lowering corporate risk and gaining stakeholder support. The readiness to actively support ESG initiatives builds trader confidence in the leadership and stocks of such companies.

Popular ESG Trading Strategies

Traders may choose to invest in sustainability-conscious stocks directly or through indices that include these stocks. They may also opt for ESG funds, such as ETFs with investments concentrated in assets with positive ESG performance.

Here’s a look at popular strategies your traders may employ to identify ESG trading options.

Best-in-Class Screening

Traders actively search for stocks that demonstrate environmentally responsible behaviours. For instance, ASML Holding NV, Avnet Inc., Applied Materials Inc., Colgate Palmolive Co. and Hasbrow Inc. rank among the top 100 ESG companies. This strategy entails investing in companies that are not directly involved in sustainable sectors but demonstrate measurable positive environmental impact.

Thematic Trading

This strategy involves investing in stocks of a particular sector. Investor preference for specific ESG themes, such as renewable energy, clean technology and sustainable agriculture, is increasing. This drives investment in these sectors. For instance, NextEra Energy Inc., Brookfield Renewable, Canadian Solar, First Solar and Siemens Gamesa Renewable Energy are renowned in the renewable energy segment. Similarly, EV companies, such as Tesla Motors Inc., General Motors Co., NIO Inc, etc., are gaining popularity.

Impact Investing

Here, traders seek investment opportunities that align with their values. For instance, reducing the environmental impact of power generation or lowering construction industry emissions. These traders require more targeted products and demand diverse options from brokerages to support their trading needs.

Exclusionary Screening

In this technique, trades exclude stocks of companies/sectors with proven negative environmental impact. They may choose to avoid these stocks, as well as ETFs and indices including them.

Support Your Traders in Their ESG Investments

The key to delivering satisfactory trader experiences is to support them throughout their trading journey. Brokers have a critical role to play in empowering traders to explore and optimise ESG opportunities.

Creating Awareness

Integrating ESG insights within your market analytics, news updates and research reports could draw traders’ attention to this trending investment technique.

Offering Education

Traders of all experience levels need support in identifying the most suitable assets. Educating them about ESG rating mechanisms and demystifying the terminology could be beneficial. Advanced traders, however, would want a more detailed analysis of how ESG trading could benefit their portfolios and the long-term impacts of adopting these strategies.

Expanding Your ESG Asset Universe

Include ESG instruments in your bouquet of offerings, such as stocks and ETFs of companies with high ESG rankings, indices including such companies, and more. Offering CFD-based products could amplify the number of opportunities traders can explore.

Don’t Forget Liquidity

Just offering the instruments isn’t enough. You must support trading them with liquidity solutions to encourage participation. Partner with a reputed multi-asset liquidity provider with deep and transparent order books. Make sure your chosen partner is regulated. This translates into peace of mind and better reporting quality.

Trust X Open Hub

Environmental, social, and governance or sustainable investing is reshaping the way trading decisions are made. As a globally trusted liquidity provider, we stay ahead of market trends and have numerous ESG investment options in our 5,000+ instrument portfolio. While we already have licenses from several tier-1 regulators that are passported to over 20 countries, XOH has now secured accreditation from the UAE’s Securities and Commodities Authority (SCA) to support brokers in the Middle East as well. We are excited about bringing world-class trading experiences to brokers and traders in the region.

XOH offers top-of-the-line liquidity and technology solutions to brokerages in 25+ countries. Our cloud servers, located across the globe in world-class data centres, ensure uninterrupted operations. Multiple integrations drive interoperability across diverse platforms for frictionless operations. For brokers, these translate into improved reconciliation. We also offer customised reporting, considering the compliance requirements of specific regulators. Speak with our team to learn how X Open Hub can support you in launching and growing your brokerage.

Reference for ESG companies:
https://www.esgbook.com/insights/esg-insights/esg-book-top-100/