Over the last decade, environmental, social and governance (ESG) investing has gone from a niche into the mainstream.
Today, the complexities around the definitions of ESG and the concept of greenwashing have become prominent issues in the investment sector, as reported by International Adviser.
ESG is a very profitable business, as fund assets rose to $52bn in the first half of 2019, according to Morningstar.
And over the next decade, Blackrock expects the total invested in ESG exchange-traded funds to exceed $400bn.
The question for advisers is: how do you look to invest in the sector?
Assessment
Knowing what to look for is the big task for investment managers about ESG.
Some firms even have a process when analysing companies for ESG investing.
Scott Thompson, business development director at Impax, told IA: “Broadly speaking we can split ESG analysis into two parts.
“Risk: ESG analysis should provide you with a more rounded view of a company and sector. That means you are less likely to be hit by a ‘left field’ event and as such your portfolio should be more resilient to the chance of a nasty drawdown.
“Opportunity: we think ESG analysis helps us to identify opportunities that will drive strong long-term performance as the economy transitions to a more sustainable model.
“When you consider that a company’s value relies on consumer preferences, societal values and often regulation, it makes sense to broaden the analysis that you undertake.”
Returns
Investors have to realise that when they invest in ESG, they should expect a return, it isn’t like philanthropy.
Blackrock said that, in the last five years, ethical indices have outperformed their non-ethical counterparts. Demand for ESG funds grew by 50% from 2013 to 2018.
“Successful ESG integration is often associated with quality companies that offer greater downside protection and yield better long-term risk adjusted returns,” Harry Merrison, investment manager at Kingswood, told IA.
“In a lot of cases long-term performance is superior to more traditional strategies because companies that behave responsibly are generally better custodians for investor capital.”
David Powell, portfolio manager of the Brown Advisory Sustainable Growth Fund, also said to IA: “Consider performance. When considering an ESG opportunity, financial advisers should also consider performance.
“Some approaches to sustainable investing seek to understand how sustainability drivers impact business fundamentals.
“Remain open-minded across sectors or areas of the market for compelling individual companies.
“Fundamentally strong companies with sustainable business advantages create compelling investing ideas that span a wide range of business models and industry opportunities ranging from energy and resource efficiency to economic and community development.”
Investors needs
Overall, when looking for investment returns, it’s all about looking after the needs of the retail investor.
These needs can stem from protecting their wealth to knowing their investments.
“What is more likely is the client is asking you to ensure externalities are fully captured in research or are seeking a portfolio which minimises the damage to society and environment (at a minimum),” James Hibbs, head of international fund solutions at Standard Bank Group, told IA.
Claudia Quiroz, investment director at Quilter Cheviot, also said to IA: “ESG means different things to different people, that much is clear. Thus, understating the investment objectives of a particular ESG fund is critical to make sure that investors have aligned their own values with the right fund.
But, it is not all about the advisers knowing about ESG, but also there needs to be some education for investors.
Impax’s Thompson also said it is “worth digging further to better understand” what the DNA of firms are when investing in ESG, and “it is also worth seeking out external assurances” to guarantee the ESG aspect of the firm.
