By Keith Black
Long-term investors know the measurable impact ESG issues have on the sustainability and profitability of companies/ asset owners. Responsible investment is an approach to investing that aims to incorporate environmental, social and governance (ESG) factors into investment decisions, to better manage risk and generate sustainable, long-term returns.
Today, Responsible Investment is undergoing a fascinating development with more asset owners wanting to make a positive societal and/or environmental impact with their investments, alongside financial returns. It’s not just about monetary gains anymore, but terms such as, kilowatt hours, crop yields or the ‘number of people affected’ are garnering greater attention and importance.
Although relatively new, Responsible Investing is still the term that has been to describe investing with the explicit purpose of achieving positive non-financial impacts in addition to financial gain. The 2017 Annual Impact Investor Survey from the Global Impact Investing Network (GIIN), puts the size of the market at $113.7bn.
The global momentum around responsible Investment is driven by:
# Active beneficiaries demanding transparency about their investment details;
# Increased recognition of the various ESG factors that play a vital role in determining risk and return in the financial community;
# Understanding that incorporating ESG factors is part of investors’ fiduciary duty to their beneficiaries and clients;
# In a world of globalisation and social media, reputational risk from rising issues including pollution, climate change, employee diversity, working conditions, corruption and aggressive tax strategies;
# Concerns over short-term impact on investment returns, company performance, and market behaviour;
# Legal requirements looking out to protect long-term interests of beneficiaries and also the wider financial system;
# Increased pressure from competitors who seek to stand apart by offering Responsible Investment services as a competitive advantage.
Difficulties in Implementation
The primary difficulties in implementing Responsible Investing policies include the absence of standardized, comparable data; managing varied constituent requirements; finding suitable investments; and the lack of dedicated resources.
Although Responsible Investing is garnering increased interest and momentum, however, there’s still a lack of clarity over standards, definitive data sources, and even what ESG or Responsible Investment means. To support this demand, a more institutional infrastructure is needed, including common standards, increased information and education.
More than three quarters (77%) of respondents to a recent CAIA-Adveq survey stated that Responsible Investing is more important than it was three years ago, while 78 percent believe that it will be even more important by 2020. The vast majority of survey respondents (84%) say Responsible Investing lacks clear industry standards, and 89 percent state that better-defined standards would encourage the development of Responsible Investment strategies and funds. Nearly three-quarters (74%) of the CAIA members responding to the survey noted a need for increasing education on Responsible Investment topics.
Undeniably, ESG is already part of the investing fabric and is becoming a mainstream aspect of investing today. The industry needs to see investment results and more pressure from asset owners and government, to develop. In an attempt to identify opportunities, and managing programs and policies more effectively, industry stakeholders including asset owners, consultants, asset managers as well as data, education and standards providers need to coordinate efforts and derive maximum benefits from ESG investing.
(The author is Managing Director, Curriculum & Exams, CAIA Association)