I often get asked: “Is environmental, social and governance investing just the next investment fad?”
As a concept, ESG investing has been around for some time. Every so often it has had its moment in the spotlight before disappearing into the shadows along with other so called ‘investment fads’.
This may be because it has often been seen – rather unfairly– for those who are “tree-huggers”, or who believe they should invest aligned to their values and ethics over returns.
But there are some very compelling reasons to suggest integrated ESG investing is more than just the investment fad of the moment.
Firstly, we don’t believe that you must sacrifice returns in order to invest in responsible and sustainable companies. That is an important first hurdle to clear.
But perhaps the most important development is the intervention by the Department for Work and Pensions (DWP).
The recent DWP consultation said trustees will be required to update their Statement of Investment Principles to reflect how they take account of financially material considerations including ESG which includes climate change by October 2019.
Why does this matter? For a start it puts ESG firmly on the radar of pension trustees and investors, helping move it from the periphery to the mainstream.
While it is entirely plausible that some trustees will see this as nothing other than a box-ticking exercise to satisfy the new regulations, it is hoped most will make a concerted effort to put ESG at the heart of their process.
Improving transparency and the increased availability of company-level ESG data is also key. The granularity and processing of ESG data is continuously getting better and will in time become cheaper and easier to collect.
As ESG data becomes increasingly more consistent and reliable, our ability to interpret and analyse it to make good investment decisions will also improve.
However, we accept that better more in-depth data will take time and it is important when considering investment solutions that integrate ESG, you understand and agree with the methodology being used. Different investment managers and index providers use different methods of judging companies against their ESG criteria.
There are signs that trustees and investors are already beginning to wake up to the benefits of integrating ESG within the investment process.
Over the past 12 months the conversations we are having both internally and externally about ESG have picked up considerably. Both from a DB and DC perspective. With the initial conversations focusing on what ESG means for them and what their investment philosophy is when considering ESG alongside other investment risks.
We believe that in time ESG will no longer be seen an optional consideration, but a vital one. And that day may come sooner than we think.
This article originally appeared in “Pensions Expert”