The rush to stand out and attract clients via ESG investing is well and truly under way. This publication drills into some of the details.
“We have designed our own in-house ‘R-eye’ rating system to measure initial ESG compliance for our managers and assets in a consistent manner. The ‘R-eye’ scorecard approach is also used to monitor and evaluate year-on-year changes. We believe ESG in ownership is as critical as ESG at entry. Furthermore, we believe our more quantitative approach to ESG measurement and data collection has the potential to better inform our investment decision making over time,” they said.
TOBAM’s Allymun said that the most advanced regions for ESG investing at present are the Nordics, France and North America. Capital Dynamics also mentioned the Nordic region as being a trailblazer.
In the US, asset management titan BlackRock ($6.32 trillion in AuM) is well placed to use its financial firepower to force ESG changes, although an organisation tracking this sector recently gave the listed firm a mixed report card.
Allfunds, the fund distribution platform business that has recently pushed into Asia, argues that demand for ESG investing is rising but acknowledges that Asia is “still in the early stages as it started from a very low base of demand”.
Information is expanding all the time to help managers work out where investment opportunities are – and areas to avoid at all costs. A few weeks ago, fund-tracker firm Morningstar published its annual Morningstar Sustainability Atlas, which shows how well the companies held by a fund are managing their ESG risks and opportunities compared with similar funds (See here.)
Information quality and availability is crucial to making ESG work, both in public listed markets and private ones, practitioners said. Sometimes data can be patchy.
With listed markets being easier to enter in some ways than private ones, is there a danger that ESG approaches could favour the former, producing an overweight stance?
Capital Dynamics doesn’t think so.
“In general, we consider change to be more easily enacted in private markets than in other markets, such as listed equities. To date, change has enabled value creation within private market assets resulting in the asset class largely outperforming its public market counterparts. ESG value levers are additional tools in the value creation toolkit to enhance stakeholder value for privately held assets. Private market managers are recognizing this ‘ESG opportunity’ to enhance value more and more,” Gostin and Willetts said.
Clients ask for it
Clients are also starting to initiate requests for ESG investment options, while in the past they conversation usually was initiated by advisors, Ben Constable-Maxwell, head of Sustainable and Impact Investing, M&G Investments, said.
Previously, we used to be the ones who raised the subject, but are now increasingly being asked about ESG by both institutional and retail clients on how we are integrating ESG into investment analysis and stewardship activities.
Constable-Maxwell ws asked how hHow should a manager go about framing expectations of clients about the monetary returns that ESG investing makes possible and whether the sector has gone beyond the idear of ESG/returns tradeoffs.
"We think we’ve gone beyond this. There is more academic and statistical data showing that there is no performance drag to strategies that incorporate ESG. Indeed a meta study from Deutsche Bank showed a positive link between high ESG standards and corporate financial performance. We hold the view that better informed investors make better investment decisions," he said.
Omar Slim, Senior Vice President, Fixed Income, PineBridge Investments, also addressed the issue of if there is any trade-off between investment results and ESG approaches.
The tradeoff between ESG and making money is often an imaginary one, not backed by conclusive empirical evidence. Systematically integrating ESG consideration in investment decision making is not only `the right and nice thing to do for our environment and society”. It is also the right way to have a holistic analysis of risks facing a company', he said.
"Simply put, you won’t know what you’re investing in if you don’t know and can’t evaluate the risks involved. For instance, a management capable of coherently articulating their business risks and how they mitigate them is clearly one that give confidence to investors. Frequent worker disputes, a board of directors that looks like a family gathering, a company which activities pose a serious threat to the environment are all ESG related red flags to us," he continued.
"But those are first and foremost investment related red flags. A company that produces hazardous material could have financial liabilities affecting its creditworthiness. Another one that has acrimonious relations with its workers could have frequent production disruptions, affecting its profitability. Having said that, ESG and investment analysis should be put within context and customized to the type of companies at hand. It also means that while quantitative favors are important, it is also important to qualitatively assess the companies, by knowing management and doing some commonsensical background research," Slim added.