Are ESG strategies increasing in popularity and among which investor segments?
There’s a real shift to ESG and our own ESG research has found that ESG/ RI investing is set to double in size in the next two years
There are numerous drivers to this. Asset owners are under regulatory and consumer pressure to promote and align investments with the wider interests of their beneficiaries. This probably explains the shift from screening investments on socially responsible criteria, to much more active behaviour around ESG risk management and ESG integration. Additionally, an increasing number of investors are looking for investments that are not excessively contributing to climate change – something which is being driven in part by the Paris Agreement and the work of the Financial Stability Board’s Taskforce on Climate related Financial Disclosures.
Do you think ESG terminology lacks clarity?
For me, ESG investing means applying ESG analysis to the company that you are going to invest in, regardless of the asset class. We call it ESG company profiling or ESG company research.
To someone else, ESG might mean green bonds or Socially Responsible Funds or a completely integrated approach to investing, such as applying ESG profiling to all your investments, which is an approach taken by few organisations, but one example is UniSuper.
Definition is the main reason why an organisation would choose not to incorporate ESG into their investment decision-making. Common terminology and a demystifying of the jargon would go a long way to wider acceptance. We published an ESG Made Simple Guide last year precisely because of the need to demystify the topic.
Can integrating ESG into investment decision-making be profitable over the long-term?
There are costs associated with integrating ESG - organisations have to invest in good quality people and to pay for the data and analytics.
Institutional investors are concerned about these costs. Our research found that cost is seen as a barrier to further incorporation of ESG by 16% of institutional investors today, with this set to rise to 27% in two years’ time. Asset managers are particularly concerned, with nearly a third expecting cost to be a significant barrier over the next two years.I think that even to this day a "cost of ESG" is considered as if it's a negative opportunity cost.
On a positive note, there is a demand for ESG services and the industry is advancing its ESG capability. I think that ESG services will be profitable for those asset managers and service providers that offer transparency and innovation.
There is an abundance of data when looking at ESG factors but the quality of the data varies and it can be difficult to extract the ‘so what?’ Do you foresee any new technologies or analytics that can support analysis?
Quantity is not the problem with data. The issue is quality, consistency and relevance. Data can be very patchy and there is a lack of consistent disclosure from investee companies.
However, we think data is going to improve for three reasons
The focus is shifting to putting data into context – analytics and scenario analysis
New regulation and guidelines
Greater transparency from investee companies (driven by investors)
There will be greater use of scenario analysis. Today much of ESG data is historical, backwards-looking data, so we will likely see a trend for forward-looking scenario planning and asking questions about future risks. That will be driven by the E in ESG because understanding climate-related risks requires you to project into the future. The Financial Stability Board’s Task Force on Climate-Related Disclosure has issued its recommendations including a 40 page technical document on scenario analysis. This is the way things are going – greater disclosure and use of analytics.
We also see exciting developments in analytics, with the use of computer science, big data and artificial intelligence becoming increasingly important in identifying new data and trends.
Where does the industry go from here with ESG?
A growing number of institutional investors now see ESG as an investment risk to be analysed alongside business or market risk. For these firms, the importance of ESG factors is no longer in question. We are now seeing firms integrating their dedicated ESG teams with their front office teams so that ESG becomes a part of their investment process.
I think the banking industry has to provide the innovation and technology to support asset owners, particularly for pension funds which have the beneficiaries but not necessarily the resources to develop their own technology and analytics. There is also real potential for innovation with technologies such as blockchain in support of green energy. It’s an exciting time for us all and I hope we can rise to the challenge.