ESG in Investment Management : New Age or Just Noise?

Kurt Schacht, Managing Director, CFA Institute

Environmental, social and governance (ESG) factors have always impacted share prices and bond yields. What’s new in the land of investment management is a growing debate calling on the profession to factor ESG as a benefit to society. Are portfolio companies pulling their weight not just on economic performance, but on their actions as good corporate citizens when it comes to social responsibility and environmental impact?

Traditionalists say nonsense – investment managers ought seek the best risk adjusted return and let customers pick their own causes with the money they save and invest. Ban the thought they should be playing politics with other people’s money, determining which causes to support.

Meanwhile, the rise of global support for the “new-age” manager says they must play a role here. That is, to hold portfolio companies to basic environmental and social behaviors that benefit society and either engage with them on that point or not invest in them.

The recent high-profile announcement from Blackrock, one of the world’s biggest asset managers, championing the integration of ESG factors into investment processes, is a case in point.

It is never easy to measure slow, incremental changes in attitudes about the role of ESG analysis. It has been an issue for over three decades in the annals of shareholder/investor focus. Some feel new-age is now becoming mainstream while others are not so sure.

“We are stirring the same old pot regarding environmental and social activism by investors”, noted one ESG skeptic. It is also the case there is a great global divide on the politics, expectations and accountabilities of the investment industry when it comes to ESG.

Our recent ESG survey results show some interesting shifts. This survey was conducted with Principles for Responsible Investment (PRI) with 1,100 financial professionals and 23 workshops in 17 investment centers around the world.

Financial Professionals Who Often/Always Integrate Material ESG Issues Into Their Investment Analysis

Source: CFA Institute and Principles for Responsible Investment (PRI) 2018 Global Survey of Investment Professionals

The State of Play

These global survey numbers (below) show that corporate governance factoring is table stakes in most jurisdictions. Meanwhile the focus on environmental and social is less, but growing and very different by region.

Three things to note:

  1. The integration of E & S into securities analysis is in its infancy
  2. The quality and consistency of issuer disclosures is poor
  3. Professional financial analysts are just now developing standardized techniques

Ideally, we will reach a state where ESG integration is just part of a standard, holistic approach to investment analysis, where material factors—traditional financial factors and ESG—are identified and assessed to form an investment opinion and decision.

Notably, within this framework, ESG can be given the desired level of weighting with traditional financial inputs to reach buy / sell / hold decisions. Proponents see this as ESG integration being seamlessly achieved, neither supplanting nor diminishing traditional financial research. It seems obvious but many managers recoil when they hear ESG.

Perception of ESG Impacts Globally By Region

Source: CFA Institute and Principles for Responsible Investment (PRI) 2018 Global Survey of Investment Professionals

ESG apprehension can be eased by pointing out what it is not. ESG integration does not mean that:

  • Investment in certain sectors, countries, and companies is prohibited
  • Portfolio returns are sacrificed to perform ESG integration techniques
  • Immaterial ESG factors affect investment decisions and traditional financial

    factors are ignored

  • Wholesale changes organization’s investment process are necessary

Finally, it’s notable that some level of ESG factoring is being considered not just by active managers but passive managers as well. This is key since in equity investing, passive strategies account for approximately half of assets under management. This means that companies will need to be much more attuned to the ESG considerations and interests of their entire base of investors.

In the end, views still differ on the true objectives of the ESG movement in investment management. So too, we must acknowledge there are lots of links in the chain of who can/should impact corporate ESG accountability. They include the Officers and Directors first and foremost. Global regulators and governments are high on the list of impact.

Likewise, the consumers of the company’s products or services can compel a shift in corporate direction, often overnight. Somewhere on the list of those able to swing corporate accountability are public shareholders (or their investment managers), via proxy proposals, divestment or engagement. Ultimately, the difference between ESG impact and noise, will be a global collaboration.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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