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Does responsible investing mean having to sacrifice returns?

14/01/2019

Researching the area of responsible investing has been encouraging in no small part because of the significantly increased interest and appetite in rewarding actors and players that are contributing to the world positively, whether this is done by addressing their gender pay gap or taking steps to mitigate the effects of climate change.

However, we were also interested in what makes a compelling argument for scepticism (or downright opposition!) to integrating sustainability or ESG criteria in investment. At first glance, concerns around underperformance remain, with some in the investment world viewing the concept as more of a charitable initiative rather than a way to boost returns. With Apple’s recent profit warning sending tech stocks tumbling (and tech stocks are heavily relied upon by a not insignificant number of responsibly or sustainably minded funds), it is perhaps more understandable than ever that some would worry that ethical and/or sustainable approaches do not make financial sense.

Then there is also the Norwegian state pension fund (the world’s largest sovereign wealth fund, no less), which ‘missed out’ on 1.9 percentage points on the return on its benchmark compared to the performance it would have had, had it chosen to continue to invest in tobacco and armament companies. The other side of the story of course is that excluding companies deemed to have breached human rights or caused significant environmental damage, such as US-based retail giant Walmart, have also boosted the fund’s return – albeit only by 0.8%.

Of course, there is no standardised definition of ESG, SRI, or related terms such as sustainable investing, and variations in the investment process mean measuring the performance of funds that incorporate ESG or similar principles can be challenging. Corporate behaviour and responsibility is of course multi-dimensional, which does not make things easier.

Other critics maintain that at times clients wanting to invest in a more responsible way by excluding particular sectors or integrating particular principles into their investing end up in costlier funds that are not too dissimilar from your run-of-the-mill index fund.

Having said that, sceptics overlooking sustainable or ethical stocks because they don’t think they will perform well means that these are more likely to be undervalued and found by bargain seeking investors.

And finally, there is what we think is the strongest argument in favour of companies with a lot of ESG momentum performing outstandingly well – the large and ever-expanding body of research (both academic and not!) demonstrating ties between long-term corporate performance and ESG criteria filtering into the investment process. Empirical evidence linking lower risks and a boost in returns to environmental social governance screening has consistently been produced over the last few years, although there have also been studies that have concluded that knowledge around the topic remains fragmented.

There is no doubt that both sides of the debate have their own vocal proponents, but of course this is simply the roundup of the press around the issue – we’ll get right back to analysing what private investors, intermediaries, and asset managers think about the ethics vs performance dilemma! 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.

Responsible Investing Resolve

07/01/2019

 

This may be the first year many people make good on their New Year’s resolution. Less attainable goals like shedding ten pounds, doing 50 push-ups a day and making a week’s worth of packed lunches Sunday evening seem to be giving way to promises to reduce plastic use, buy local and recycle clothes. We have already seen record numbers sign up for Veganuary; discussions with colleagues, friends and family increasingly reflect heightened consumer cognisance of all sorts of environmental issues, from garbage islands in the Pacific to the carbon footprint of an avocado.

Yes, 2019 might just be the year that reusable coffee cups and eco-friendly cling film become trendier accessories than a pug or a yoga mat. But will it be the year that investors finally embrace sustainable investing en masse?

There are a few things working in sustainable investing’s favour aside from the collective consumer wake-up increasingly termed the ‘Blue Planet effect’. For one, the regulatory intent is there: last year the Department for Work and Pensions clarified that pension trustees should consider Environmental, Social and Governance (ESG) factors as part of their fiduciary duty to scheme members, and the FCA is currently garnering opinion industry-wide on climate change and green finance through a discussion paper. Data provision is improving too, with portfolio managers now able to assess a whole manner of data points from companies directly and the likes of Sustainalytics to help them assess ESG-related risks. And demand from UK institutional and retail investors is growing, albeit not as quickly as some investor sentiment surveys would have you believe. By our numbers, roughly half of pension schemes and consultants have a more positive opinion of ESG investing than a year ago; a tenth of private investors claim to have a responsible investment of some description.

Yet there is still a long way to go to convince investors that sustainable investing is more than a fad, or a New Year’s resolution destined to be abandoned six months down the track. Currently, a particularly potent headwind to converting investors is market volatility. For relatively newly-launched ESG, sustainable and positive impact funds, these bumps in the road are unhelpful in proving their value. Plus these funds can be more growth and small-cap biased than peers, depending on the interpretation of ‘sustainable’ implemented in the investment process, which may have resulted in sharper performance falls recently.

Unfortunately for wealth managers and financial advisers, performance shocks have coincided with the new MiFID II cost transparency requirements. Effectively, a £1m client is being told he/she has paid £7,000-£10,000 to lose 8% of their invested money in 2018. If wealth managers get spooked into short termism, the imperative to invest in developing technologies and away from the ol’ reliable dividend-paying tobacco and oil companies could be put on the backburner.

Despite cynicism and headwinds, we continue to believe in the long-term investment case for sustainable investing, having followed growing momentum in our research over the past few years and spoken with scores of thought leaders on the subject. As part of our ‘commitment to the cause’, we will be publishing our first Responsible Investment Review in the spring, which will detail the market landscape, investor understanding and interest across retail and institutional audiences, and highlight the asset management responsible investment ‘heroes’. One of Research in Finance’s New Year’s resolutions is to share more of our thoughts and findings, so expect to see sustainable investing musings and research snippets from us on a weekly or fortnightly basis.

This may be the first year many people make good on their New Year’s resolution. Less attainable goals like shedding ten pounds, doing 50 push-ups a day and making a week’s worth of packed lunches Sunday evening seem to be giving way to promises to reduce plastic use, buy local and recycle clothes.

We have already seen record numbers sign up for Veganuary; discussions with colleagues, friends and family increasingly reflect heightened consumer cognisance of all sorts of environmental issues, from garbage islands in the Pacific to the carbon footprint of an avocado.

Yes, 2019 might just be the year that reusable coffee cups and eco-friendly cling film become trendier accessories than a pug or a yoga mat. But will it be the year that investors finally embrace sustainable investing en masse?

There are a few things working in sustainable investing’s favour aside from the collective consumer wake-up increasingly termed the ‘Blue Planet effect’. For one, the regulatory intent is there: last year the Department for Work and Pensions clarified that pension trustees should consider Environmental, Social and Governance (ESG) factors as part of their fiduciary duty to scheme members, and the FCA is currently garnering opinion industry-wide on climate change and green finance through a discussion paper. Data provision is improving too, with portfolio managers now able to assess a whole manner of data points from companies directly and the likes of Sustainalytics to help them assess ESG-related risks. And demand from UK institutional and retail investors is growing, albeit not as quickly as some investor sentiment surveys would have you believe. By our numbers, roughly half of pension schemes and consultants have a more positive opinion of ESG investing than a year ago; a tenth of private investors claim to have a responsible investment of some description.

Yet there is still a long way to go to convince investors that sustainable investing is more than a fad, or a New Year’s resolution destined to be abandoned six months down the track. Currently, a particularly potent headwind to converting investors is market volatility. For relatively newly-launched ESG, sustainable and positive impact funds, these bumps in the road are unhelpful in proving their value. Plus these funds can be more growth and small-cap biased than peers, depending on the interpretation of ‘sustainable’ implemented in the investment process, which may have resulted in sharper performance falls recently.

Unfortunately for wealth managers and financial advisers, performance shocks have coincided with the new MiFID II cost transparency requirements. Effectively, a £1m client is being told he/she has paid £7,000-£10,000 to lose 8% of their invested money in 2018. If wealth managers get spooked into short termism, the imperative to invest in developing technologies and away from the ol’ reliable dividend-paying tobacco and oil companies could be put on the backburner.

Despite cynicism and headwinds, we continue to believe in the long-term investment case for sustainable investing, having followed growing momentum in our research over the past few years and spoken with scores of thought leaders on the subject. As part of our ‘commitment to the cause’, we will be publishing our first Responsible Investment Review in the spring, which will detail the market landscape, investor understanding and interest across retail and institutional audiences, and highlight the asset management responsible investment ‘heroes’. One of Research in Finance’s New Year’s resolutions is to share more of our thoughts and findings, so expect to see sustainable investing musings and research snippets from us on a weekly or fortnightly basis.

The Responsible Investment Review is Research in Finance’s annual written report into the fast-developing Environmental, Social and Governance (ESG) and broader responsible investing market.

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 12 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.

 

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