What’s so good about ESG investing?

Responsible investing, specifically environmental, social and governance investing, is on the rise, but what’s driving this wave of ‘good’ investment?

According to the 2018 Global Sustainable Investment Alliance (GSIA), there are $22.9 trillion assets professionally managed under responsible investment strategies. That’s a 25% increase since the 2014 review. Sustainable investments now represent about 26% of assets managed globally. Sustainable investing grew in both absolute and relative terms in nearly every market represented in the report.

ESG investing utilises both financial and non-financial criteria to screen potential investments.

• Environmental (how a company performs as a steward of nature)
• Social (how it manages relationships with employees, suppliers, customers and the communities where it operates)
• Governance (a company’s leadership, executive pay, audits, internal controls, and shareholder rights)

Rise of the millennial investor

Besides extensive high-profile research on ESG value creation, one of the main megatrends influencing the pro-ESG appetite is the rise of the millennial investor.

“We are witnessing the largest generational transfer of wealth in history,” says Jason Jay, a Senior Lecturer at the MIT Sloan School of Management and Director of the Sustainability Initiative at MIT Sloan.

“Millennials are the most influential and discerning consumer class of this era and that concern extends towards their investments as well.”

The growing power of regulations

Another important element is the institutional influence wielded by regulators and advocacy groups. Judy Cotte, CEO of ESG Global Advisors, believes a major impetus for ESG’s popularity is the growth in signatories to the UN Principles for Responsible Investment (PRI).

Cotte points to the slew of formal and informal Stewardship Codes around the world that “encourage investors to integrate ESG and be more active stewards of their investments through engagement and proxy voting”.

Of particular note are the UK Stewardship Code, overseen by the Financial Conduct Authority, the first such code of its kind, and the Framework for U.S. Stewardship and Governance, issued by the Investor Stewardship Group in the USA.

The former code has six basic stewardship principles for investors and six basic corporate governance principles for companies.

ESG investing: From West to East

According to Cotte, ESG integration is “considered mainstream by many, many large asset owners and asset managers in North America.” Also, some of the evolution in ESG investing is being played out in growth markets elsewhere, including India, Asia Pacific and Africa.

In Asia, although pure ESG-focused hedge funds are at the nascent stages of development, some mainstream hedge funds proactively favour ESG-compliant industries and stocks.

Private banks in the region are beginning to put ESG exchange-traded funds (ETFs) on their recommendation lists in a bid to attract more millennial clients.

“My experience is that ultra-high-net-worth millennials in Asia are more engaged in impact investing if they have a family office set up to do this,” explains Angelina Yao, a former portfolio manager at BlackRock and the founder of Heels & Yield in Hong Kong, which offers female-focused financial management consultancy services.

“Most millennials do consider Impact Investing ETFs but lack the know-how to measure their effectiveness, which dissuades them from investing. That’s where we come in with the education, framework, and knowledge to measure their impact investing performance,” explains Yao.

Indian ESG developments

India has seen a series of substantial developments on the ESG investing front in the past two years. “Our journey into ESG began when we assessed our past performance and realised we had lost money when companies were misgoverned or took environmental shortcuts,” says Nilesh Shah, the Managing Director of Kotak Mahindra Asset Management Company Limited (Kotak AMC).

The firm, one of India’s top 10 fund houses, was the first asset management company to sign the PRI in 2018. That same year, SBI Mutual Fund launched the first ESG mutual fund in India.

“The first half of 2019 saw ESG hitting the Indian headlines with two $1 billion funds announced. One by Avendus Capital and another by a group of former Tata Group executives in partnership with Quantum Advisors. Avendus plans to raise funds over the next two years, with 70% of the money coming from overseas investors. The latter, an equal joint venture with Tata’s former Chief Ethics Officer, Mukund Rajan as Chairman, will mobilise funds from long-term foreign investors such as pension funds, sovereign wealth funds and family offices of high net worth individuals.”

In the second part of this ESG investigation, we look at its investment performance, the need for standardisation and the argument for taking a long-term investment view.

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