What was ESG? What is ESG now? And where is ESG going?
Experts: David Beacham, Business Development Director, Head of Regional Sales, Carmignac
Facilitator: Jo Goddard, Founder, Green & Good Consulting
Key Takeaways:
- Should ESG be seen as business as usual? It’s the reality for some and a hope for others. The ESG proposition is the differentiator
- ESG is not going away, but it will evolve
- The language in this area is confusing, too many acronyms and lack of definition. Standardisation and certification can be helpful
- Integration of ESG seen as a whole rather than splitting out the S, although social elements important to attract and retain talent
- ESG investment is a mindset for clients, advisors have the power to signal towards ethical investment
- Developing appropriate technology and meeting the demands of the younger generation requires future focus.
Context:
ESG investments are becoming the norm within asset management, with advisors now expected to have an opinion and knowledge in this area. The prominence of ESG has evolved over time and in some respects has become a confused area with an array of acronyms and approaches. During the pandemic the prominence of the social side of the agenda has risen, especially in terms of a business’s response to their employees. How far has the ‘S’ of ESG become prominent in investment decisions?
- Should ESG be seen as business as usual? It’s the reality for some and a hope for others. The ESG proposition is the differentiator
Environmental, social and governance issues are rising in prominence within asset management, with advisors needing to provide knowledge in this area. Over the past few years, the market has developed significantly, with some good returns on investments and increasing consumer awareness of ESG issues. For some advisors their ESG offer is very much seen as business as usual whereas for others it is more a separate topic of conversation. What is clear is that having an ESG proposition is important and can be a helpful differentiator between firms.
An ideal scenario would see ESG as a hygiene factor within firms both in terms of an internal business proposition and as an offer to clients. The focus of conversation should be on the impact that the client wants to have – and tailoring a proposal to meet the desired impact. ESG is an opportunity to make a stand for what you believe in as a firm and can help advisors better understand what the client believes in.
What is clear is that the enormity of the growth in this area requires greater knowledge and an impactful response.
- ESG is not going away, but it will evolve
The consideration of ESG issues in investments is not new. A selection of SRI funds was commonplace at asset managers over ten years ago – usually a very small percentage of total AUM. Now considered more mainstream, the language has changed, the knowledge developed and performance (im)proved – ESG investing is not going away any time soon. It’s a focus now for a reason, and that matches the appetite in the global market for change, for sustainable development and support for a low carbon economy. Our understanding may evolve, technological solutions improve and language change – but ESG is here to stay.
- The language in this area is confusing, too many acronyms and lack of definition. Standardisation and certification can be helpful
The terminology surrounding this area can be confusing. What started as ethical investment, then SRI (socially responsible investment) and now ESG – can cause some issues with firms and clients. Some advisors use the term sustainability which more easily explains the issues the business faces internally as well as in the investment proposition – with some finding that this term has more connectivity with the target audience. But is there a right term or acronym? Not necessarily, but the term chosen should resonate with the firm and the proposition and ensure that is credible rather than a box-ticking exercise.
Some firms are looking to standardisation and certification – such as B-Corp, while others find the language of the UN Sustainable Development Goals (SDGs) useful as an engagement tool. Most importantly, it is clearly felt that having a positive impact is the end game and a common-sense approach should be used on how to get there. Advisors are starting to find the right blend.
- Integration of ESG seen as a whole rather than splitting out the S, although social elements important to attract and retain talent
In terms of the S of ESG becoming prominent – clearly, due the Covid-19 crisis, there has been an increased focus on social issues. It is important for employees in terms of flexible working, personal development, and health and wellbeing for example. But advisors felt that it can’t easily be separated out as an employee proposition or in the approach to underlying investments – and it is recognised as a key factor in a better engaged employee base. Other frameworks such as Investors in People help with attraction and retention of employees alongside a good ESG strategy.
- ESG investment is a mindset for clients, advisors have the power to signal towards ethical investment
Advisors present a variety of experiences with clients and ESG. Some clients are sophisticated in this area, they have been investing ethically for a while and expect a balanced portfolio, whereas for others the investment manager can be a driving force in helping them select ESG funds. Now that performance of these funds has delivered it makes a little difference, however, advisors are asked more about such investments when the issues make the news and become more public knowledge – the Attenborough or Greta effect, for example. Clients need guidance from advisors and therefore advisors have the power to drive this forward.
Overall advisors see an ESG mindset in clients, rather than selecting a few choice funds. That mindset may see investment in new green technologies, electric vehicle manufacturers for example. These investments may have their own social and governance issues which require extra investigation however.
- Developing appropriate technology and meeting the demands of the younger generation require future focus
From a practical point of view, selecting funds to meet all of the needs of clients is not simple to do. Technology that ticks all of the boxes is not readily available and, therefore, meeting the complex demands of more engaged clients can be harder to fulfil.
Conclusions
There is an increasing Gen Z demand. While some have money to invest, others will look to their corporate pension to take a stance on ESG. Some might be priced out of the market in making this choice and is incumbent on investment managers to ensure that this doesn’t happen. In a perfect future, all fund managers will naturally incorporate ESG across funds and it will therefore be less of a focus for dialogue, and more naturally BAU.
