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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.

For more info email us here 

How are Blue Monday and ESG related?

21/01/2019

In the UK, the third Monday of January has been designated as Blue Monday. With Christmas and New Year festivities forgotten, work pressures renewed, the Beast from the East threatening to return and vitamin D levels running low, there are both physiological and psychological reasons why today is supposedly the most depressing day of the year.

The dialogue around mental health issues has improved dramatically in recent decades, but action to tackle them through public health measures or company policies is still lacking. And as with all public health predicaments, there is an associated financial cost. The City Mental Health Alliance has estimated that mental illness is costing City employers alone £100m a year as long hours and job insecurity cause undue stress. This is based on sufferers being absent from work more often and less productive when they are present.

ESG analysis in investing often includes health and wellbeing factors, but these tend to focus on physical rather than mental health. It is easier to assess the health and safety measures implemented along a supply chain than it is to ascertain whether a) members of staff are chronically stressed or unhappy and b) to what degree the company is contributing to or alleviating their suffering.

Julia Dreblow, founder of sriServices and Fund EcoMarket, suggests that while fund managers have not been conducting explicitly happiness-focused research, “Mental health is increasingly rising up the corporate agenda, and therefore the investment agenda.”

She adds: “Motivations will vary, but at its most basic level employees who are happy in their jobs are likely to be more productive and take less time off through ill health. Companies with ‘happier’ employees will also benefit from better staff retention and – all other factors being equal – find it easier to attract new staff.”

A quick search on the FundEcoMarket research tool brings up strategies from several fund managers that consider health and wellbeing policies. Julia explains, “In practice, this means they will favour companies with sound employment practices and companies that provide products intended to make us healthier and happier.”

We asked an ethical researcher at a wealth management firm how close they really get to looking at mental health. While difficult to measure directly, she comments that many proxy indicators exist, such as turnover rate, absence rate, employee satisfaction, evidence of stress management/wellbeing programmes and policies on flexible working. So some relevant data will be available (and probably in more comprehensive form from larger companies), but “it’s definitely more art than science”!

There are some big FTSE players that do – at least outwardly – appear to be promoting mental wellbeing. A number of ESG gurus we’ve spoken with recently highlight Fundsmith favourite Unilever for committing to its vast Sustainable Living Plan. In addition to various measures aimed at employee welfare at Unilever HQ and along the supply chain, the company has set itself many external-facing goals. Its health and wellbeing ones are centred on fundamentals like improving access to safe drinking water and hygiene products, but notably include Dove Self-Esteem programmes for young people. Unilever has also pioneered body image-positive ad campaigns for women and ‘anti-stereotyping’ campaigns aimed at men.

British economist Richard Layard would approve. Regarded as one of the first happiness economists, his current focus is mental illness prevention and the positive impact this would have on society and the economy. For those with the stomach for academic pontificating and number crunching, his paper on measuring wellbeing gives some useful steers on how life satisfaction and emotional state can be gauged.

To end this Blue Monday blog on a cheerful note, companies are starting to take note of mental wellbeing in the workplace. And the more ESG analysts and portfolio managers push the issue, the greater the pressure will be for companies to up their game. If more data on wellbeing is expected to placate investors, there will be a clearer picture of issues and greater opportunity to address them. More measuring means less suffering in silence.

Perceptions, worries and fears around responsible investing will all revealed in detail in our upcoming Responsible Investing Review, of course, available in spring 2019. We have spoken in-depth to over 60 experts on the issue, including private investors, financial advisers, discretionary fund managers, and more, and have consulted over 1400 stakeholders through quantitative means.

The first issue is due for publication in spring 2019 and will include insight from all angles:

*Surveys measuring appeal, preferences and take-up among professional and private investors

*Deep-dive commentary from industry experts, including fund ratings agencies, fund buyers, fund managers and stewardship specialists

*Analysis of ESG/responsible assets, flows and performance

*Comprehensive review of government regulation and trade association guidance supporting the growth of ESG investing

*Findings-led predictions on the growth potential for responsible investing

To express an interest in becoming a stakeholder in this ground-breaking report, please contact Toby Finden-Crofts (email or call 0207 104 2236) or Richard Ley (email or call 0207 104 2239).

Research in Finance is uniquely placed to produce such a report. We have access to each audience via our own proprietary panels.

(Only 10 delegate spaces remain at the breakfast briefing)

Subscribing firms will receive 2x report copies, soft copy for internal use, plus the opportunity for two of your team to attend a breakfast briefing where RiF will present some key findings at their London HQ – space at this briefing is limited after a successful launch phase.

NEW – Subscribing firms can take the option to place a 1000 word content piece in the participant report which is distributed to all respondents – plus available to members of the RiF Panel.

 

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