ESG investing has come a long way but there remain misconceptions, gaps in data and need for more development, industry figures say.
Environmental, social and governance-driven ways to invest are all the rage. But this is still a relatively young field. There is a lot of work to be done in providing the data and measures of results to bring it fully into the mainstream, practitioners say.
As chronicled by this news service over the past few weeks, ESG is a hot wealth management topic, and some of the biggest firms, such as BNP Paribas and UBS, stress their ESG credentials. (See an editorial analysis here.)
The field is very much a case of work in progress.
“ESG contributes to a sustainable economy and we think that ESG can be a source of Alpha,” Sisi Liu, ESG specialist at Harvest Global Investments, told this publication. “ESG investing is not completely new. People have found a more structured way of formulating this investment approach and process to better manage risks and invest in opportunities the long run.”
Clients are becoming more interested in Asia-focused ESG investment ideas, she continued.
Some firms make the “right noises” but only some of them fully embrace the ESG thesis and embed it into how they manage money, according to Lisa Beauvilain, head of sustainability and ESG, managing director, Impax, a specialist in the space. ESG is not sufficient on its own – does a person who talks about ESG treat it as a primarily moral matter or investment one. The field is still developing, she said.
A vexed question is whether the wealth management sector has resolved the debate whether ESG investing involves a trade-off between returns and ethical comfort.
“Not really,” Beauvilain, said. “A recent survey in The Times [of London] asked readers if they were interested in sustainable investing or making money. Oddly enough people like to make money. But, when IEM asked consumers their views – would you like to make returns and have positive impact, the overwhelming majority said yes, more than double the next response which was to make money regardless of how it was invested,” she said. “The idea that to invest sustainably means sacrificing returns persists despite plenty of data that debunks this, including returns from managers that invest in this way,” she said.
Benchmarks and performance
There’s a need for more widely accepted yardsticks of ESG performance, Harvest’s Sisi Liu said: “ESG frameworks are not standardised enough for everyone to be adopting the same approach."
Progress is being made, however. For example, S&P Dow Jones Indices, the index provider whose indices are used by exchange-traded funds and the wider investment sector to compare performance, has added new lines to its global environmental, social and governance index family. In 2016 the fund tracker, Morningstar, rolled out ESG cores, which scan more than 20,000 mutual funds and exchange-traded funds. S&P Global Ratings has launched ESG sections in its corporate credit rating reports. On the equities side, Morningstar launched a low carbon risk index family.
There are still some misperceptions about what ESG is, industry figures argue.
“In terms of uptake, there is still a perception that ESG is not about better risk adjusted returns, it is about some sort of charitable endeavour, and that is not unique to Asia, but we see that as one of the typical barriers to growth,” Stephanie Maier, director, responsible investment – HSBC Global Asset Management, said.
“Education is important. Sustainable investment isn’t one thing. There are different approaches, there are different things that are in or out, some strategies are more or less exclusionary, some target particular positive outcomes, some just try to avoid the risks, so there is a broader education needed about what this market is,” she continued.
Whether ESG goes mainstream will hinge around public policy, Maier said, citing the example of the European Union.
“The EU Sustainable Finance Action Plan outlined very specific measures around disclosure by companies and investors, clarification of fiduciary duty and how that relates to incorporating sustainability factors in the investment process, as well as the role of the supervisory bodies of financial institutions and credit rating agencies and how they should incorporate sustainability into their ratings,” she said.
“As a market, we are reflecting those broader ESG risks rather than the more narrow financial metrics. That is something we already see happening. The framework is evolving from a regulators’ perspective. In terms of more specific sustainable products, the EU put out a draft taxonomy for consultation on that, which had a very narrow green focus rather than a broad sustainability focus, but what goes in to that taxonomy and what doesn’t is one way of trying to define the market better,” she said.
The noise level around ESG is changing greatly, Nuveen, a firm with more than $20 billion of ESG investments, told this publication. (Nuveen is the asset management arm of TIAA, the investment group.)
“There is a marked difference in the conversation over the years. The level of interest it’s receiving at large firms is having a trickle-down effect. We’ve seen a commitment to bring this [ESG] to clients in a more actionable way,” Amy O’Brien, global head of responsible investing, said.
Wealth management end-clients will vary in how they insert ESG investments into portfolios: some making it the central core of their asset allocation decisions, O’Brien continued.
An issue for some clients is that not all of their preferred ESG ideas are investable yet, she said.
Clients’ motivations for pursuing ESG opportunities vary. Some people like it because it makes them smarter investors, and can be applied to mitigate risk. For others, it is about values and goals.
The ways that investment managers engage with clients is changing. Long gone are the days when a client might receive an academic paper or aspirational level report on these matters once a year, O’Brien said. Firm-level commitments are important to communicate, but clients are focusing more on portfolio-level metrics and proof points on social and environmental outcomes.
The terminology of this market can be confusing. There’s a difference between ESG and what goes under the moniker of impact investing. With the latter term, it is about seeking to bring about a particular result – or impact – and hopefully to make money as well.
“I don’t think that wealth management clients have enough of an understanding of the difference between impact and ESG. While ESG is a great way for investors to access more responsible investments, it has its limits as the focus of its three ESG risk criteria may miss more significant contributions to society that businesses can make,” Julian Pickstone, head of impact investing at Triple Point, a UK-based firm that manages funds such as venture capital trusts and Enterprise Investment Schemes, said.
“A significant misconception surrounding impact investing is the belief there has to be a trade-off between investing in a company that does good and the return it can generate. Instead, impact [investing] specifically targets companies that make a positive impact on society, while also delivering market rate returns. Consequently, the more integrated perspective of impact investing may capture additional returns for some wealth management clients,” Pickstone said.