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ESG factors and investment viability

ESG factors and investment viability

Asset managers and wealth managers will face numerous challenges and opportunities over the next decade from dealing with Brexit to enabling a growing population to fund for retirement and, of course, delivering meaningful investment returns in a continued low-interest-rate environment.

One of the items at the top of my list is ensuring we lead the way in addressing the world’s environmental, social and governance (ESG) challenges through the way we invest. By this, I do not merely mean that fund managers hold boards accountable for what senior management of companies are paid.

Corporate governance issues such as the remuneration of chief executives are already–quite rightly, in my view–under close scrutiny by shareholders, policymakers and the media. What I’m talking about is something that is far broader in nature and, at its core, is about the long-term viability of each underlying investment, given its potential impact on our world.

ESG factors are financially material considerations with a direct impact on long-term corporate performance. Therefore, as stewards of other people’s money, asset managers need to factor in ESG, as well as financial, issues into their investment evaluation and selection.

Asset managers need to factor in ESG, as well as financial, issues into their investment evaluation and selection.

But such considerations are not only applicable to equities. These key, material issues are also pivotal when making investments in bonds, property, private equity and infrastructure. Each asset class needs its own, distinctive method of integrating material ESG factors into its investment process. But the overarching philosophy is the same: Understand the asset completely; analyze fully the key risks and opportunities that the asset is facing, both now and in the future; and select assets based on this information.

By having full visibility of an asset before investing–understanding where it is now and where it is heading fund managers are empowered to make better investment decisions for their clients. And the investment decision is not only about the financial return. Having a full understanding of an investment means that fund managers can pick those assets that they believe appear to be a sound long-term financial investment and have a clear, positive potential impact for the environment or society.

Clients also are increasingly interested in these twin attributes. Whether it’s a large pension fund or the man and woman on the street, investors are now looking to put their money in companies (or assets) that not only help them achieve their financial goals but also can deliver longer-term positive impacts—whether in renewable energy, smarter reuse of natural resources, using technology to raise living standards or creating more sustainable food production. In 2017, the Morgan Stanley Institute for Sustainable Investing Survey revealed 84% of women and 67% of men are interested in sustainable investing. This chimes with research from J.P. Morgan that forecast demand for impact investing strategies could reach $1 trillion by 2020.

The world faces huge and urgent challenges, including climate change, food and water scarcity, rising pollution and social inequality. As asset managers, we believe that we need to direct capital to those companies, products and new technologies that are helping to tackle these issues. Moreover, we also need to recognize that those companies, ventures and asset classes that are playing a clear and active part in providing solutions to the world’s societal and environmental problems are also the investments that could deliver more sustainable returns to investors in the future.

A version of this article was posted to the Investment Week site on October 8, 2018.

Important Information

Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).

Property investments may carry additional risk of loss due to the nature and volatility of the underlying investments and may not be available for investment by investors unless the investor meets certain regulatory requirements. In considering the prior performance information contained herein, potential investors should bear in mind that past performance is not necessarily indicative of future results, and there can be no assurance that such investments will achieve comparable results.

Among the risks presented by private equity investing are substantial commitment requirements, credit risk, lack of liquidity, fees associated with investing, lack of control over investments and or governance, investment risks, leverage and tax considerations. Private equity investments can also be affected by environmental conditions / events, political and economic developments, taxes and other government regulations.