Investors with ESG metrics built into their decision-making are more effective in managing risks. Elena Philipova, Global Head ESG Proposition, spoke to ETF TV about how regulation and higher data standards can lower the barriers to sustainable investing.
- Research shows that ESG metrics used within investment strategies help to manage risk and maintain returns very close to traditional benchmarks.
- Regulation helps to move capital towards sustainable solutions, as well as enable the industry to speak the same language.
- The barriers to sustainable investing, such as data availability and consistency, are being brought down by multiple industry stakeholders.
“Sustainable investing” today covers a basket of terms, including socially responsible investing, environment, social and governance (ESG) investing and impact investing.
This style of investing recognizes that ‘tangibles’ contribute 20-30 percent of a company’s value, but ‘intangibles’ such as social impact actually create the company behind an asset or investment.
Millennials and women are two groups of investors driving demand for ESG-themed products and solutions, since they are benefiting from one of the largest wealth transfers in history. It’s estimated that by the end of 2020, the millennial generation will hold US$20 trillion in assets.
Companies can no longer afford to ignore ESG issues. The cost of inaction is rising as more corporate value is being crushed due to ESG-related scandals.
Investors are using data to show that there is a risk mitigation benefit in using an ESG lens.
Research shows that investors who incorporate sustainability characteristics as measured by ESG ratings are able to manage risk better and maintain return characteristics very close to traditional benchmarks.
When analyzing emerging markets, investors who incorporate ESG considerations can find their portfolios tilt toward higher-quality investments, with an element of risk mitigation.
Watch: Refinitiv Perspectives LIVE – ESG Investment, a cure all for Asset Management?
Sustainable investing tools
It all starts with data. Investors need to be able to analyze it, extract insights, aggregate it and develop different products and propositions. A lot of ESG data today didn’t exist as recently as five years ago.
Investors currently using ESG strategies are managing risks effectively and some are outperforming the benchmarks. However, a lot more remains to be done in terms of data consistency, standardization and transparency.
One of the missing ingredients lies in the realm of regulation. Regulators have an important role to play and set basic definitions and standards that are adopted as the industry standard coming from a reputable, respected place.
The European Commission is showing leadership in the global marketplace, since it published an ambitious action plan on sustainable finance that touches on all market participants in the capital markets value chain.
The plan is helping market participants identify a common language to understand the challenges and risks of inaction and jointly move capital in the direction of sustainable products and solutions that will enable our society to sustain economic growth and prosperity.
The approach to sustainable finance differs between European and the United States. Europe is seeing one of the most comprehensive and ambitious agendas globally coming from any regulatory body.
In the U.S., the administration has pushed some of the ESG topics and issues lower on its priority list, although there is still strong momentum and initiatives coming from the private sector and the states.
Overall, it’s important for investors to clearly define their investment objectives.
This will help develop the right sustainable investing strategy, as some financial professionals adopt “values” based investing built around negative screening and avoiding companies in industries such as tobacco, alcohol or armaments.
Others will look for a “valuation” strategy like “best–in-class screening” and best-performing companies in terms of ESG characteristics.
There will also be those that are more engaged with the companies in which they invest.
None of these strategies are exclusive. Investors can adopt them at different stages of their investment process to identify the highest-quality opportunities that align with their objectives.
Investors are quickly adopting sustainable investment strategies and allocating capital towards the assets that will power our society’s economic prosperity.
Barriers for adoption like standardization and data availability are being brought down by collaborative efforts from multiple stakeholders in the industry. We are living through a transformation, which creates a sea of opportunities.