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Mainstreaming ESG: the growth and evolution of responsible investing

28/01/2019

This past week we have seen a significant amount of media coverage of the major themes discussed at the annual World Economic Forum in Davos, which in the context of a difficult political and economic environment, has devoted a fair amount of time and energy to issues such as climate change and mental health – both topics we have discussed before on this blog. It follows from this that sustainable investing would also be on the agenda, and ‘mainstreaming’ ESG was also a topic of focus for the WEF last year. Oxfam’s annual report also comes out around this time, with statistics on global inequality inevitably making the rounds, and for good reason. The reduction of global inequality is one of the UN’s Sustainable Development Goals, and many ESG-oriented funds look to these (very ambitious!) goals to frame their investment philosophy and strategy around.

In this context, we thought it would be interesting to pause and reflect on the extent to which responsible investing has become ‘mainstream’. Twelve years after the European Investment Bank launched the first green bond, marking a shift in the way renewable energy projects were funded, the conversation around sustainable investing and ESG integration has changed. Forbes estimates around a quarter of professionally managed assets globally incorporate some type of ESG screening.

Looking to 2007 makes sense – a year before the global downturn hit, enlisting private sector funding for climate risk mitigation became a requirement rather than a nice-to-have. The green bond market has since exploded, and by 2017 over $155 bn of public and corporate green bonds had been issued.

Some interesting concepts around responsible and sustainable investing have indeed been discussed at this year’s WEF, with UBS talking about the launch of their 100% sustainable debt product that invests in World Bank debt and is linked to the UN’s 17 Sustainable Development Goals, all in response to what the Swiss bank sees as promising levels of demand for investing more ethically.

UBS’ Simon Smiles claims that sustainable investment instruments that offer a personalised portfolio related to very specific issues such as access to water or climate change mitigation (rather than a more ‘generic’ ESG screener) currently enjoy more demand among ultra high net worth clients of the bank. More personalised product tailoring in the ESG space is certainly an interesting idea if it allows asset managers to match investors’ priorities with highly specific values.

Another development we have come across during our research process is the emergence of ESG-screened ETFs. The impact of these is not to be neglected – with fees falling significantly, investors are no longer required to pay a premium to incorporate ESG research into the investment process. Although these are said to have grown exponentially in recent years and continue to be very popular (77 ETF ESG funds were launched in the first 6 months of 2018), data indicates that ETFs still play a relatively minor role in SRI.

Looking at where we are today, ESG factors and sustainability are seen as a means of risk management by an increasing number of investors, while at the same time recognising that societal expectations around decisions made by governments and companies have changed.

In addition, the so-called millennial generation has also applied some pressure in shifting these expectations and there is some evidence that the young people replacing them – Gen Z – may be even more committed.

Our upcoming Responsible Investment Review will look at the current size and growth potential of the responsible and ESG investing landscape in the UK. Spanning various audiences, from financial advisers to private investors and institutional investors, we hope to have succeeded in establishing to what extent this previously ‘niche’ investment philosophy has disrupted the investment management industry.

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