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ESG and Impact Investing

Environmental, social and governance investing has become a permanent feature of global asset management.

ESG and Impact Investing

Investors are increasingly cognizant of the benefits of incorporating environmental, social and governance (ESG) criteria into their investment decision making. This trend reveals itself in many guises: screens, index tilts, integration into financial decision-making and impact investments, where positive societal impact is a focus.

Large institutions have led the charge, especially those based in continental Europe. However, retail and wholesale interest is on the rise. Advisors reported a 32 percent increase in client interest regarding ESG investing from 2016 to 2017. This trend is expected to continue. Advisors estimate that, dollar-for-dollar, two-and-a-half times more of their assets under management (AUM) will be invested in responsible investing by 2020.

FOUR LONG-TERM GROWTH DRIVERS OF ESG DEMAND

  1. Climate change. Scientific consensus supports global climate change and its effects will become even more noticeable.
  2. Support from supra-national bodies. The UNPRI was the globally galvanising force, with many domestic regulators enhancing its impact with additional legislation.
  3. Demographic change. Wealth is expanding beyond baby boomers to millennials and women, both of whom have a higher propensity to invest with ESG considerations.
  4. Follow the leader. The largest, most respected global institutions are leading developments in ESG. These leaders will create followers and also a supply response from asset managers looking to gain access to the trillions of dollars controlled by these institutional elite.

FIRMS MUST PREPARE FOR THE QUALITY OF IMPLEMENTATION TO BECOME MORE IMPORTANT AMIDST GROWING SOPHISTICATION

Broadridge and Apex Fund Services recently co-hosted an event, “ESG and Impact Investing: A Critical Market Path,” to discuss emerging ideas and insights on impact investing. The results of an informal, post-event attendee survey showed significant demand for socially conscious investing strategies.

When asked about interest in ESG strategy that they have observed to date:

  • Eighty Eight percent of respondents reported receiving questions regarding their ESG strategy from clients and investors.
  • Eighty Three percent of respondents mentioned they are adopting ESG strategies within their firm either now or during the next year.

Our results echo a clear consensus that interest in ESG is growing. But, we also believe that interest is growing more sophisticated and will become even more so in the near future.

DRIVERS OF GREATER SOPHISTICATION

  • Greater client professionalism. Many institutions are still in the early stages of experience with ESG integration. Large institutions are hiring dedicated staff to focus on implementing best practices across the full portfolio.
  • Consultants are enhancing manager research. Global investment consultants like Mercer are increasingly differentiating managers on their ESG ratings. This process has been slow for some, but is now picking up speed.
  • Competition amongst managers. With demand comes a host of suppliers looking to prove that their ESG approach is the best. Hence, all the whitepapers explaining why
  • Regulators and government setting standards. The European Union, amongst other bodies, is diligently working to improve the standardization of the taxonomy on sustainable finance and climate activities.

SOPHISTICATED INVESTORS WILL NOT TOLERATE "GREENWASHING" AND EXPECT MEASURABLE OUTCOMES

Against a backdrop of growing demand for ESG, you can almost forgive certain asset managers for painting a "green" facade over existing investment processes, with changes only skin-deep. This will increasingly not be tolerated, and the quality of implementation will emerge as a key differentiator. A key challenge facing impact investing is the absence of uniform standards to measure ESG alignment to impact.

Thematic and impact strategies will gain ground in both public and private market investments, but client interest will be led by larger investors and most socially aligned (e.g., foundations). The focus will shift more and more to being able to measure progress toward stated goals. This is all part of ESG growing up and becoming a core pillar of the global asset management industry.

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References

1. Calvert Research, "The Rise of ESG Investing"