ESG: Your heart better be in it

Discussions about ESG investing between The Lens, asset managers and investors have spiked this year. ESG is not all talk, mind you. Consider this: a group of investors with $2 trillion of assets under management is currently challenging 55 large European companies on their approach to climate lobbying. The group includes the Church of England Pension Fund and Sweden’s AP7, and the corporates targeted include BP, Rio Tinto and Volkswagen.

Another group, this time comprised of UK fund management firms, has recently partnered with The Big Issue Group to launch a platform for impact funds aimed at the retail market.

Along with all this, CAMRADATA reports more mandate searches containing ESG criteria – such as low carbon or impact investing – attached to them. Managers are being asked supplementary RFP questions to demonstrate credentials in these areas.

The Boston Consulting Group has estimated that assets managed under some form of sustainable, responsible investing mandate across the globe grew from $18 trillion in 2014, to $23 trillion in 2016. Assets in this sector are now more than a quarter of total managed assets and The Lens suspects the figure is somewhat larger – and growing – as 2019 nears.

The impression we have formed at The Lens is that the decision to invest in ESG-related portfolios are often the investors’. Not all pension schemes are equipped to support ESG but regulation will likely force schemes of whatever ESG persuasion or size to adopt responsible investing practices.

Not only will certain pension schemes have difficulty adjusting, but so will a number of asset managers. For some, their heart is not in it – at least not in being told how to do it. The CFA Institute found recently that there are high levels of opposition to regulatory enforcement – which is currently being discussed in Brussels – with 71% of investment professionals surveyed in the UK saying they were opposed to such a measure.

Yet with our without regulation, The Lens suggests asset managers will in future need to not only convince investors that their ESG offering is robust, but even become transparent to the point of explaining why they do not invest in certain companies on ESG measures.

As this happens, it is likely that ESG will eventually become a normal part of risk management along with credit risk and other traditional sources of financial risk. This includes for less traditional asset classes, too. The Lens recently attended a CAMRADATA alternatives roundtable where one investor said a sustainability component within its investments was incorporated through an allocation to alternatives. That allocation was 40% of the portfolio.

At CAMRADATA’s quarterly insurance breakfast, comparisons were drawn to the situation when insurers only had ESG at the very backs of their minds. Now, the issue is discussed at boardrooms level and fed through to investment committees.

2018 may have been the year of ESG, but it’s not going away in 2019.