Future of esg investing

Philipp Hildebrand. Firstly, technology and the rise of transparency are here to stay. You will not continue to receive KPMG subscriptions until you accept the changes. At the same time, the data are imperfect, scoring methodologies differ, and investors need to gain greater clarity on the pitfalls of this emerging field. Important notes : Unless otherwise noted, index returns do not reflect any management fees, transaction costs or expenses.

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Ten years from now people won’t future of esg investing having inveshing about ESG as a separate discipline. ESG will be part of how one does business in the investment world. Looking back, I can see a time when my grandkids might say, ‘You futurs you knowingly invested in companies that investijg polluting or using sweatshop labor? Investing consistent with environmental, social and governance ESG principles can no longer be dismissed as a short-term fad. Assets under management are growing slowly but steadily, accompanied by a rise in the number and type of investment options across asset classes. The negative consequences of ignoring ESG principles have become obvious, and certain large global consulting firms have even explicitly incorporated ESG into their investment belief statements. There are still those, however, who view ESG investing with deep skepticism.

Evolving ESG data

Environmental, Social, and Governance ESG refers to the three central factors in measuring the sustainability and societal impact of an investment in a company or business. These criteria help to better determine the future financial performance of companies return and risk. Historical decisions of where financial assets would be placed were based on various criteria, financial return being predominant. It was in the s and 60s that the vast pension funds managed by the trades unions recognised the opportunity to affect the wider social environment using their capital assets [4] —in the United States the International Brotherhood of Electrical Workers invested their considerable capital in developing affordable housing projects, whilst the United Mine Workers invested in health facilities. In the s, the worldwide abhorrence of the apartheid regime in South Africa led to one of the most renowned examples of selective disinvestment along ethical lines. As a response to a growing call for sanctions against the regime, the Reverend Leon Sullivan , a board member of General Motors in the United States, drew up a Code of Conduct in for practising business with South Africa.

Ten years from eag people won’t be having conversations about ESG as a separate discipline. ESG will be part of how one does business in the investment world. Looking back, I can see a time when my grandkids future of esg investing say, ‘You mean you knowingly invested in companies that were polluting or using sweatshop labor? Investing consistent with environmental, social and governance ESG principles can no longer be dismissed as a short-term fad.

Assets under management are growing slowly but steadily, accompanied by a rise in the number and type of investment options across asset classes. The negative consequences of ignoring ESG principles have become obvious, and certain large global consulting firms have even explicitly incorporated ESG into their investment belief statements. There are still those, however, who view ESG investing with deep skepticism. In this paper, ClearBridge explores the evolving philosophy of Fo investing with emphasis on how different investment organizations apply ESG principles.

The perspectives captured here reflect online survey responses and telephone interviews with diverse sources, including asset owners, consultants, financial advisors and ESG experts. There is greater evidence that ESG principles have a positive impact on long-term risk-adjusted returns.

People have been investing this way and studying this approach to investing for decades. There are numerous studies and even meta studies documenting investijg long-term cuture benefits of investing consistent with ESG principles. Another meta study concluded that of 36 performance ufture, 20 found evidence of a positive relationship between ESG factors fsg financial performance and only three found evidence of a negative relationship.

That concern is based on old information. Implementation has evolved toward strategies focusing on positive attributes. The investment focus invrsting ESG has moved far beyond its origins in the late s, when this approach was primarily about avoiding «sin stocks» in portfolios held by religious organizations.

ESG is no longer merely about passive avoidance of companies in industries such as tobacco or firearms. Instead, the emphasis is on finding companies with certain quality attributes — e. Through proxy voting and shareholder engagement, investment managers now also seek to improve ESG practices among companies being considered for investment.

The number of high-quality ESG investment options is increasing within and across asset classes. ESG has grown not only in assets under management but also in inbesting number of choices being offered. Consultants and financial advisors tell ClearBridge that there has been an explosion in new ESG-oriented investment strategies and vehicles — from index and smart beta funds to ESG quant strategies and strategies offering different approaches to shareholder engagement.

As a result, it is becoming easier to build an entire asset allocation consistent with ESG principles, including public and private equity, fixed income and alternative assets. The choices have increased both in number and in quality. Now many high-quality ESG managers are coming to us.

Demand is growing. More people want ESG in their portfolios and continued growth is likely to come from a number of different sources. University endowments are responding to student demands for fossil fuel divestment, and foundations are coming to see ESG as a way to extend their influence on issues that they care.

But now with an increased focus on climate change and its related risks, many institutions are discussing ESG and how they might integrate those factors into the management of their investment portfolios.

Just during the past year, we have seen more interest in ESG than ever. People, especially Millennials, want to invest the way they live. The logic behind this source of demand is blazingly simple. If you strive not to waste water and energy at home, you likely want to invest in companies that are finding new ways to conserve resources.

If you boycott the products of known polluters at your local supermarket, you are unlikely to endorse their presence in your portfolio. They are much less likely to continue to work for a company over many years if that company has, for example, a deleterious effect on the environment or is poorly run with no women on the board. In Septemberthe foundation announced its decision to divest from fossil fuels and is increasing its investment in alternative energy sources.

Rockefeller, «we are funding work on climate change, so we do not want to be hypocritical. We also want to amplify the impact of our program work. Investors are embracing a broader definition of fiduciary duty.

Investing in companies that apply ESG best practices increasingly is seen as part of an expanded definition of what it means to be a fiduciary. Many of those interviewed by ClearBridge now view fiduciary responsibility with a significantly longer time horizon, as opposed to the standard one- three- and five-year industry metrics. This new interpretation of fiduciary duty partially reflects a growing understanding of the negative effects of short-termism — the maximize-returns-in-the-short-term-at-any-cost mindset that still prevails in many boardrooms, especially in the U.

As a result, the U. Fuuture believe that ESG limits the universe of investments, which in turn limits potential ftuure opportunities. Many U. If you are invested in an ESG portfolio that is underweight energy at a time when energy stocks outperform, you might underperform due to this sector underweight — just as you will outperform when energy stocks perform poorly. Says Craig Metrick of Cornerstone Capital Group, «ESG investing can result in sector or style biases that oof cause ESG strategies to outperform or underperform in a given time period, but over the long term we expect tilts toward sustainability and governance will pay off.

Says a consultant who has focused on ESG for the past decade, «there is futuree kind of mental block. The broad Nivesting for Responsible Investment say nothing about screening or prohibiting investments, yet the initial eg from many U.

The market sometimes misunderstands ESG performance drivers. Public equity portfolios managed consistent with ESG principles can underperform precisely because they are filled with high-quality growth companies. Explains Noelle Laing, «ESG factors tend to correlate to quality — stable earnings, quality management teams, lower debt — while the opposite of quality tends to be favored in a risk-on environment.

I am less concerned when ESG managers underperform in such an environment. It is a near-term phenomenon, and many of these higher-quality managers have provided investors with protection on the downside. While growing, the universe of ESG managers remains small and undiversified relative to the universe of non-ESG managers. It may be getting easier to build an entire ESG portfolio diversified across asset classes. But it’s still not easy. And while the choice of investments may not be limited, the choice of institutional-quality investment managers with an established fkture record still is limited in relative terms.

While ESG is definitely growing in terms of the number, type and quality of choices, there still is a broader manager opportunity set outside of ESG, particularly in certain asset classes. Implementation in a total portfolio context can be difficult. Depending investting the goals of the organization, ESG implementation can occur across the entire portfolio or selectively as opportunities arise in certain asset classes.

One financial advisor who recommends ESG told us that his clients «are looking at O strategies in different investinng classes when a search comes up. Many investors still want more proof. While evidence is strong that ESG can pay off at the company or security level, the benefits are more difficult to prove at the portfolio level where returns are heavily influenced by a key variable that affects returns in any portfolio: manager skill. They are still skeptical, believing that ESG somehow hurts performance, and they are just going to need more proof.

Even card-carrying proponents of ESG, we learned, sometimes view it primarily as a risk mitigation tool no fines, lawsuits or negative press for polluting as opposed to a source of opportunity new companies and technologies that prevent pollution.

ClearBridge believes that ESG is the future of investing and that someday it won’t even be called «ESG» invesitng designated as a separate discipline; it will become an integral part of the way invesring analyze companies. At ClearBridge, ESG is not merely a screen or an overlay; it inveeting part of how we conduct fundamental research and it investijg how we think about all companies considered for investment in all client portfolios. Our clients, whether or not they desire a portfolio explicitly wsg «ESG,» are all responsible for investment goals — growing pensions, funding grants or delivering retirement income — to be achieved far into the future.

They deserve to invest in companies that plan carefully for what’s ahead, companies that care about the environment, their employees, their customers and their community. Esy believe such companies are most likely to provide the kind of performance our clients need to meet their long-term goals. There are many different ways to describe strategies for investing consistent with environmental, social and governance best practices. These include «sustainable investing,» «socially responsible investing» and more recently «impact investing,» among.

The term «ESG» represents the latest stage lnvesting the evolution away from merely screening out futyre industries or companies. ClearBridge ESG portfolios do not simply avoid certain industries; we integrate industry-specific ESG factors into our fundamental research process for the entire firm and favor companies that promote best practices on environmental, social and corporate invvesting issues.

Starting inall companies considered for investment across the platform were given an ESG rating, to be updated annually, invezting only companies rated «A» or better can be included in the ESG portfolios.

Futute also work actively with companies seeking to improve their ESG performance through direct engagement and proxy voting. In inveesting, ClearBridge can investijg custom portfolios based on specific client investingg. Of the 36 studies reviewed by Mercer, 20 showed evidence of a positive relationship between ESG factors and financial performance, two showed evidence of a neutral-positive relationship, three showed evidence of a negative-neutral relationship, eight of a neutral relationship and three of a negative relationship.

The views expressed are those of ClearBridge Investments, are current as of March 31,and are subject to change without notice. The opinions should not be construed as investment advice or recommendations on behalf of any ClearBridge or Legg Mason product.

This material should not be used as the sole basis for an investment decision. Factual information relating to the topics inveating was obtained from sources invexting to be reliable, but there can be no guarantee as to their accuracy. To the extent that specific securities are mentioned in the imvesting, they have been selected to illustrate views expressed in the commentary and do not represent securities purchased, sold or recommended for clients of ClearBridge Investments, and it should not be assumed that investments in kf securities have been or will be profitable.

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The Future of Sustainable Investing

Tell us once and we’ll remember.

Stocks of sustainable companies tend to significantly outperform their less sustainable counterparts. ESG Investing has developed rapidly over the past decade. This report is not approved, reviewed or produced by MSCI. With the growing interest investibg sustainable investing, data providers have increased their efforts in gathering and reporting ESG indicators. The information provided here is neither tax nor legal advice. Seg strategies. Our work fuels our conviction that the future of investing is sustainable. Market insights. Understanding the rise in ESG and the Social Investing Movements World economies are facing growing indebtedness and unsustainable asset prices as we enter an unsettling geopolitical reality, where nationalism and populism are creating go-it-alone state mentalities leading to rising military, economic and commercial tensions.