24 Feb 2020 | 09.45 am
ESG Investing At Tipping Point
But it is not an investment panacea, cautions Ian Slattery of Zurich Life
24 Feb 2020 | 09.45 am
What amounts to Environmental, Social and Governance (ESG) investing is difficult to pin down but its millennial appeal is growing, writes Chris Sparks
As concern over global warming and climate change increases, the issue of Responsible Investing is assuming more importance among fund managers and the companies that sell consumers pensions and other investment products. State Street Global Investors, one of the world’s largest investors, estimates that broadly-defined ESG investing now amounts to c.$30 trillion, over a quarter of the world’s professionally managed assets.
In a recent survey of 300 institutional investors, State Street identified fiduciary duty, regulation and mitigating ESG risk as the main push factors driving investors towards ESG. On the other hand, data quality, internal resource constraints and the need for expertise are cited as the factors pulling investors away from ESG.
State Street also found that the fiduciary factor cuts both ways. Cited by 46% as a push factor driving ESG engagement, fiduciary duty is also viewed as a barrier to adoption by one-third of investment professionals. The report authors muse that among many managers there is a lingering concern that ESG adoption may hinder the ability to maximise returns.
The SSGI report quotes Michael Cappucci of Harvard Management Company as follows: “On the active management side, it’s extraordinarily difficult to attribute good or bad performance to ESG factors alone. There are so many different factors that impact performance across a portfolio that it’s difficult to isolate any one. Passive has an enormous advantage in attribution of being better able to isolate different factors.”
The ESG halo matters for life companies when it comes to marketing pensions to younger people. Recently Irish Life stated that it is targeting 30% reduction in the carbon intensity of flagship investment portfolios by year-end. As there is no standard framework to measure a carbon footprint, Irish Life customers will have to take that one on trust.
The most straightforward ESG investment approach is exclusion. For millennials concerned about carbon emissions, the unit fund being pitched at them can exclude airlines, car manufacturers, cement companies, oil and gas producers, utilities and any other large energy consumers. Responsible Investing can also mean shunning companies involved in tobacco, gambling, weapons, fur and adult entertainment.
State Street’s view is that ESG investing has clearly reached a tipping point where institutional investors cannot afford to ignore it. The implication going forward is that emissions-unfriendly stocks will find fewer institutional buyers in the coming decade.
In a recent note to brokers, Ian Slattery (pictured), investment consultant at Zurich Life, commented that employers, trustees and advisors can use the ESG concept in a number of ways to engage and appeal to young workers who are starting their pension saving journey. Slattery cautioned that ESG investing is not an investment panacea, and the jury is still out on whether it is the route to enhanced investment performance.
Slattery added: “Most active managers will rightly argue that taking into account social and governance factors is just part of being a prudent investment manager. They may have concerns about the economic impact of excluding or minimising exposure to certain sectors of the market, which may still be profitable and therefore ‘good’ investments.”
In Slattery’s view, despite significant appetite for Responsible Investing, the lack of standardisation in measuring the ‘impact’ of investments is a barrier to greater adoption. Nevertheless, his view is that ESG is seeping into people’s investment mindset. That means that when pensions become mandatory in a few years’ time, employers funding PRSAs should have a handle on which fund providers have properly engaged with the ESG concept.