Talking about sustainability practices and environmental, social and governance

Written by Topco Staff Writer

01/07/2020

Talking about sustainability practices and environmental, social and governance

As investors are increasingly led by their social values, more listed companies have been incorporating ESG principles

By Hortense Bioy, Eugene Visagie and Victoria Reuvers

In many markets, including the USA and the EU, sustainability in the form of environment, social, governance (ESG) integration is increasingly seen as part of fiduciary duty. There’s also a growing body of research which suggests that good environmental, social and governance practices translate into good business results, and lead to more sustainable markets and better outcomes for societies. A company with good ESG credentials is a company that’s well-positioned to deal with the challenges of the future.

As investors are increasingly led by their social values, more listed companies have been incorporating ESG principles (some even establishing an ESG sub-committees to the board) to address some of these concerns. This way, companies that operate in sectors that are perceived to be bad for the environment can get a more positive score by establishing practices that partially offset their carbon footprints.

This is broadly done in three ways:

  • Values alignment: screening out or excluding certain stocks
  • ESG integration: mitigating risk and generating alpha
  • Impact or thematic investing: mission-driven companies searching for solutions to large-scale environmental and social issues.

Sustainable funds and ESG integration come in several forms. As ESG considerations grow, more asset managers are starting to recognise sustainability issues in their investment processes. By contrast, ESG integration funds take a more thorough approach, building portfolios that reflect sustainability factors and often screen out certain industries or companies. Impact funds look at measurable social and environmental impacts alongside financial return, while sustainable sector funds focus on the growing green economy.

Going forward, we expect more conventional funds to move into the broader ESG consideration group and more ESG integration funds to move towards impact investing. Sustainable sector funds should also experience growth as more investors see opportunities in the low-carbon transition to a green economy.

ESG incorporation and sustainable funds have plenty of room to grow. Assets under management and flows, though both higher than ever before, remain tiny compared with the overall investment universe. While many financial intermediaries are yet to fully embrace sustainable investing, asset managers are recognising the fiduciary benefits – not to mention satisfying investor demand – that come from incorporating sustainable practices.

Ultimately, though, it doesn’t matter which tool you use. The bottom line is that ESG is coming, and local investment advisors and asset managers should make sure they’re up to speed. We’re already seeing instances in Europe and the US where institutions give their business exclusively to asset managers with ESG credentials and capabilities. This is not a boat we want to miss.

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