Awareness of the importance of assessing investment portfolios for environmental, social and governance risks is improving, but concerns among ESG experts persist that insufficient numbers of asset owners truly understand the long-term implications of ignoring these metrics.
In recent weeks, a flurry of studies attempted to measure ESG engagement levels among investors.
Investment consultant Aon acknowledged that interest in “responsible investing” has continued to grow in its report entitled Global Perspectives on Responsible Investing, but recognised that less than half of UK and European investors (47 per cent) and less than a third (30 per cent) of US investors have a responsible investment policy in place.
The number one reason cited in the Aon report for not adopting a responsible investment policy was that there is still a lack of consensus about whether ESG has a material impact on returns. This view is held despite a plethora of research suggesting otherwise.
In 2017, consultancy group EY cited research from the University of Hamburg in its paper entitled Investing in a Sustainable Tomorrow. The company states that “academic research indicates a link between corporate sustainability — a company integrating ESG goals into its strategy — and company financial performance.”
Despite this, it seems that not all investors are convinced. The problem, according to experts lies in the fact that some recognised issues to do with corporate risk are not initially considered to be ESG risks by investors.
“I used to be a fund manager years ago in the city” says Anne-Marie Williams, investor engagement manager at Share Action. “Some of the issues I had with companies were ESG issues but they just weren’t called that years ago.”
Williams argues that investors will grow to recognise the importance of adopting an ESG policy, only when they realise that mainstream risks can be classified in this way.
She says that there are some more progressive asset owners who have implemented well-thought-out sustainable investment policies, but says this approach won’t become mainstream until the new ESG regulatory requirements on issues like climate change – proposed in both the UK and the European Union – start to be implemented.
“This will make a huge difference,” she says. “Pension schemes know that climate change risk is there, but they think it is something that they don’t have to worry about now. They don’t realise the financial implications.”
Some experts say that the consultants need to play a bigger role in encouraging investors to look more closely at ESG issues, as part of their wider duty to their clients.
Jim Totty, a fund manager for the Noble Sustainability Growth Fund, said he has witnessed first hand how investment consultants approach ESG issues in the alternatives market.
“One of the big issues we see in the market is the investment consultants and how they embrace ESG themed funds in alternatives. While there are some investment consultants that have been early pioneers in ESG, others have been slower to come to the party.
“Getting the whole investment consultant community up to speed on ESG would be a great outcome and it is starting to happen, but It is not a prime focus for investment strategies.”
Totty said that he spoke with one mid-tier investment consultant about their approach and was surprised to hear how frank the response was when he asked about their basic service offering.
“They said their basic package doesn’t include ESG because trustees in the smaller pension funds don’t want to pay extra for ESG advice. You find that you can get into a virtuous circle.”
Of course, it is easy to blame one corner of the market for a lack of widespread adoption, but there are signs that things are improving. Another separate survey from Mercer found that 17% of European pension funds now consider climate change in their investment decision making, up from 5% the previous year. While these figures are still low as a percentage total, the trajectory shows that the speed of change is at a least quickening.
