Environmental, social and governance (ESG) have been buzzwords in the financial world for some years now. But what does ESG actually mean? The meaning can be quite broad and define anything from meeting carbon benchmarks to employee welfare.
As Will Mayne, senior director of global insights at Broadridge Financial Solutions, indicates, the scope of meaning can be quite a minefield for some countries, regions and sectors to understand and navigate.
He says: “The reality is that both investors and the asset management industry are trying to figure out exactly what their objectives for responsible investment actually are, and they are very diverse! Avoid risk, avoid a regulatory breach, outperform, improve society, reduce carbon footprint, don’t get sued–to name but a few. The challenge for an asset manager is trying to develop a credible and globally consistent strategy on responsible investing that spans these varied objectives from investors in different regions.”
As Valéry Thery, group product manager for ESG Solutions at CACEIS highlights: “Responsible investing was a very niche sector, with investors looking to avoid supporting the oil, arms, tobacco and other undesirable industries. This idea has however expanded significantly and far from a fad, has become a norm or in some cases, a requirement.”
Arguably, a matter of most prominence right now is the ‘E’ aspect of the initiatives–the environmental and what the financial industry can actually do about it.
Underpinned by the concern shown by David Attenborough in the Netflix series ‘Our Planet’, the growing awareness of plastic pollution in our oceans, the rise in global forest fires and water shortages, environmental matters are starting to climb up the ladder of many financial firm’s priorities.
As Jeff Greaney, head of product management–investment analytics at Northern Trust, cites: “Northern Trust has been working with leading pension funds and foundations in this area for many years, but over the past 18 to 24 months we’ve really seen the focus on responsible investing and ESG specific risks turning mainstream.”
He adds: “If I look back five years, there were a handful of clients really focused on this area but now it is much more common.”
But it’s not just pension funds and foundations leading the change.
At the time of writing, climate change protestors, known as Extinction Rebellion, have brought Waterloo Bridge in London to a standstill to raise awareness of climate change, headed mostly by the younger generation—a generation growing up with an understanding of environmental concepts and concerns going forward. This is the same generation beginning to invest assets.
As Frances Barney, head of global risk solutions at BNY Mellon asset servicing, explains: “Numerous studies have shown that millennials are significantly more interested than older generations in responsible investing.”
She adds: “As they age, millennials are increasing their share of global investable assets, in part through intra-generational transfer. This growing demand is encouraging the provision of more information for individual investors to participate in the discussions around socially responsible investing.”
And as Greaney voices: “Investor demographics are changing. As time passes the millennial generation will continue to have a greater voice in a society which, I think, will lead to even greater focus on transparency and social awareness in the industry.”
In the last few years, the tide has turned and the growing concern for the planet is beginning to infiltrate into the asset management world, changing attitudes and outlooks, quite radically.
Marc Briol, CEO of Pictet, states: “[Investing in ESG] comes from a sense of conviction. Companies that may not yet be doing it are maybe only looking for pure monetary benefit. ESG-related benefits will naturalise over the longer-term for the next generation.”
And as Marie-Laure Schaufelberger, group stewardship officer at Pictet, affirms: “There’s a shared notion that we need to go toward a better system, and toward a financial system that fosters a better planet and better conditions for people. That will be conducive to more stability, you need stability for a stable economy and a healthy planet.”
If you attended this years’ Association of the Luxembourg Fund Industry Asset Management conference in Luxembourg earlier this year, you would have seen Gabrielle Walker’s presentation on the frightening effects of climate change and the effects climate change could have on the financial industry, in particular.
Walker indicated that if the Earth’s temperature rises just four degrees, assets of around $4.2 trillion in present value terms could be lost. She said: “This is not a game of compliance or ticking boxes, the urgency is real.” However, Walker highlighted the “fiduciary story is changing, people are starting to put climate change as one of their top priorities”.
Walker also asserted around 17 percent of European pension funds are incorporating ESG investment into their funds, and she is hopeful that percentage will rise in the years to come.She pointed out: “Companies worth a total of $7 trillion have already signed up to a voluntary task force on climate change. They see which way the wind is blowing. There are strategies to decarbonise.”
Similarly, a recent study by BNP Paribas Securities Services indicated that 52 percent of ESG investments have seen “improved long-term returns” since 2017. The study also found that over 65 percent of asset managers and owners reported they had aligned their investment strategies alongside the United Nations sustainable development goals by creating revenue targets for investee companies.
The stronger commitment to ESG investment since 2017 is reflected further by statistics that show asset managers and owners have increased 25 percent or more of their investments in funds incorporating ESGs by 9 percent and 27 percent, respectively.
Pensions
At this year’s TSAM London: the Summit for Asset Management, a member of the World’s Pensions Council discussed the emergence of ESG initiatives within pension funds.
The speaker discussed the rapid level at which ESG initiatives are arising within pension funds and asset owner’s agendas. He said: “ESG initiatives used to be an after-thought or impact mandate, but they are now becoming essential to the future of finance.”
ESG and impact investing were also popular topics at this year’s Linedata conference in London.
The panellists were asked whether companies would be able to invest if they did not comply with ESG, to which one panellist replied: “Our clients are large institutional clients, such as pension funds and we certainly have seen an increased demand for products that are ESG compliant.”
One speaker affirmed: “Momentum is growing and we are seeing very positive outcomes for companies who embark upon the ESG route. If you don’t embark upon this route other companies will and you will be excluded.”
Initiatives
Barney indicates that one of the biggest challenges for ESG investment is the ability for investors and asset managers to analyse their investments against sustainability factors.
She says: “[BNY Mellon] is engaged with a number of organisations in order to help our clients. We have recently launched a new reporting service that enables clients to track their portfolio investments based on ESG factors and United Nations global compact principles.”
Greaney states: “[Northern Trust is] a participant in the Carbon Disclosure Project, a signatory to the United Nations Principles for Responsible Investing and have 30 years of experience in socially responsible investing, with $88 billion in ESG assets under management as of 31 March 2019. Our 2017 report describes our strategic focus on diversity and inclusion, community engagement and environmental sustainability.”
Mayne cites: “At Broadridge, we’ve recognised our important role in analysing and translating this very varied global demand from investors on behalf of our asset manager clients who are struggling to create the right investment products and services. Our insights and consulting services help asset managers define their ESG strategy because it is our firm belief that this is not a capability that can be sidelined or created overnight. Credibility demands the right investment, and that needs to begin by understanding client demand.”
