There is mounting evidence that investment funds which observe environmental, social and governance (ESG) standards in their strategies tend to outperform those that don’t by a significant margin, according to the Financial Times.
With graphic evidence from index providers, global investment managers and Europe’s biggest insurers the article by James Kynge argues that the “outperformance of ESG strategies is beyond doubt”.
“It is time for ESG investing to become mainstream,” says Isabelle Mateos y Lago, global macro investment strategist at BlackRock.
“In the research process of every team at BlackRock, we are increasingly ensuring that they take ESG into account.”
The trend of companies that score highly on ESG outstripping those that don’t is particularly pronounced in emerging markets, with the outperformance gap reaching a record in June this year.
At a global level four FTSE Russell indices, which select companies involved in energy efficiency, water technology and other green applications, have all outperformed their benchmark, the FTSE Global All Cap Index.
The ESG phenomenon has blossomed in spite of an absence of detailed, globally-agreed definitions on what constitutes ESG standards, writes Kynge.
“ChemSec has been providing the investment sector with data and information to capture question of chemicals. Corporate chemical management will need to be even more transparent as the investors’ community transitions further towards ESG strategies. For example, the Dow Jones Sustainability Index has included meaningful chemical questions in their evaluation. Now others need to follow,” says Sonja Haider, ChemSec Senior Investors Advisor.
Index providers, investment managers, pension fund executives and others are investing for many reasons – for example, to capture the opportunity of clean technologies but also to insulate portfolios against the decline of dirty industry and to manage risks from catastrophic weather events.
Although ESG is still evolving as a concept, the pull it exerts over investors appears to be reaching a critical mass.
When the history of ESG investing is written, 2017 will be seen as the year in which it reached tipping point, says Rory Sullivan, head of standards and sustainable investment at FTSE Russell.
The shift in investing is being mirrored by a shift towards indices tracking for ESG, which will involve investment into yet more ESG-compliant companies.
In July this year Japan’s Government Pension Investment Fund, the world’s largest, said it had selected three ESG indices to track for, and Swiss Re announced plans to benchmark its entire portfolio against ESG indices.
“The infrastructure is quickly being built within large asset managers to make ESG investing mainstream,” says Emily Chew, head of ESG at Manulife Asset Management.
“This includes policies, staffing, governance oversight and reporting on implementation.”
The industry body Global Sustainable Investment Alliance estimated that “ESG integration”, defined as the explicit inclusion of ESG factors into financial analysis, reached $10.4tn in 2016, up 38 per cent from 2014.
There is criticism of the lack of clear market standards, commonly accepted terminologies and guidelines for ESG. However the job of devising clear regulatory guidelines for ESG investing is gathering pace. Since the UN Principles for Responsible Investment were introduced in 2006 the number of signatories has grown from about 100 to 1784.
Stewardship codes for ESG investing have been issued in seven countries in Asia, a key proponent of ESG, as well as the UK and South Africa.
While some of these codes are entirely voluntary and some only ask that companies comply or explain their enforcement “the overall direction towards more active, engaged and responsible investing is clear,” says Manulife’s Ms Chew.