Meg Voorhes: In our biennial reports on US Sustainable, Responsible and Impact Investing Trends, we count the assets of US money managers and institutional asset owners that make some formal reference that they consider environmental, social or corporate governance issues in their investment policies.
However, we find that some of the larger money managers that have been entering this space in recent years don’t provide a great deal of detail about which ESG specific issues they consider, just that they consider “ESG” generally.
"Some larger money managers that have been entering this space
don’t provide a great deal of detail about which ESG issues they consider"
They also may not provide a lot of information about how they incorporate these policies. As a result, some observers question whether these firms are really walking their talk on ESG.
Insurance Investor: In spite of no clear-cut definition of what constitutes ESG, how do investors select the types of investments that they want to include in their portfolio?
Meg: There is more scrutiny around how money management firms are voting on proposals on ESG issues at publicly traded companies’ annual meetings.
Does the fund manager, for example, support proposals that encourage portfolio companies to look for diverse board candidates and to include more women and racial minorities on their boards?
Are the fund managers supporting shareholder proposals asking companies to curb their greenhouse gas emissions?
For individuals, the mutual funds or ETFs that they select will likely reflect their particular concerns, be it climate change, board diversity, community relations, etc.
"There is more scrutiny around how money management
firms are voting on proposals on ESG issues"
On our webpage of the mutual funds and ETFs offered by our members, we provide not only financial performance over one, three, five and ten years if the funds have been in existence that long, we also provide information on the various ESG issues the fund managers take into account.
For our Trends survey, which is carried out every two years, we ask money managers that consider ESG issues as part of their investment process why they do so. The leading response is client demand.
In addition, many money managers also say that they consider ESG to manage and limit risk and because of their fiduciary duties.
There is a growing realisation amongst money managers that looking at ESG data can help them improve returns, manage risks and better serve their clients.
Meg: We don’t do analysis ourselves on financial performance, but we do try to make this information available on our website by flagging academic reports and reports by financial institutions that analyse ESG investment performance.
"Incorporating ESG data doesn’t hurt fund performance
and, in the majority of cases, it seems to help."
For example, a meta-analysis was done in 2015 by Deutsche Asset and Wealth Management and Hamburg University. They looked at over 2000 empirical studies, some of which went back to the 1970s, related to ESG and sustainable investing.
They found that for companies, there seems to be a correlation between good ESG records and good financial performance.
There are also numerous studies that compare the performance of funds considering ESG issues with those of their conventional counterparts.
Generally, they find that incorporating ESG data doesn’t hurt fund performance and, in the majority of cases, it seems to help.
Meg: One theory is that gathering ESG data is a way of assessing that very intangible factor of management quality.
Companies that have good records on ESG issues are probably more likely to have managements that are thinking into the future, are thinking outside of the box, and are better prepared to withstand economic shocks.
"Gathering ESG data is a way of assessing that
very intangible factor of management quality."
Anecdotally, I have heard from financial advisors who specialise in sustainable investing and cater to ESG-focused clients, that they feel that these clients are more orientated towards the long term.
These clients tend not to panic or sell off funds during a downturn.
Meg: Companies are certainly very aware of the growing interest in sustainable investing and are responding in various ways.
We have seen an increase in companies that issue sustainability reports and provide sustainability data.
Many of these companies are eager to get feedback from sustainable investors. As one of our
benefits for members, we organise company calls which provide companies that report on sustainability, the opportunity to engage with the analysts and fund managers in our membership who review corporate ESG data.
"Some companies are embarrassed by being called out
by investors who are concerned about sustainability issues"
Companies find it helpful to talk to this segment of investors. However, some companies are embarrassed by being called out by investors who are concerned about sustainability issues.
They are very aware that shareholder proposals that raise ESG issues have been getting higher levels of support, if not necessarily majority support, at their annual meetings in recent years.
Sadly, a big business coalition, led by the Business Roundtable, has lobbied the Securities and Exchange Commission to make it more difficult for investors to file shareholder resolutions.
There are a number of companies out there who don’t like investor scrutiny and are trying to shut it down.
This certainly isn’t true for all publicly traded companies, but we are seeing it.
