There is little evidence to suggest that funds which have their investments screened for environmental, social and governance (ESG) criteria give better or worse returns. But increasingly clients like to know that their savings are not contributing to doing harm, or may even be doing some good.
Photo: Marion Dessard
“Our research team has identified 77 academic studies into the link between returns of ESG funds. Half say these funds do better than average, half say they do worse. I think we can conclude from this that long term investors will see similar returns to standard funds,” commented Robert de Guigné, head of ESG solutions at Lombard Odier Investment Managers. He was speaking on the second day of the Alfi Global Distribution Conference, Wednesday 26 September, as part of the “Does sustainability help you sell?” panel.
Increased investor appetite
There was consensus that ESG criteria do help sales, with de Guigné pointing to research showing a clear inflection point in early 2015, with investors increasingly going for these products. He linked this trend to the VW “diesel-gate” scandal breaking at this time, as well as the signature of the Paris Climate Agreement. He made the bold prediction that by the end of the next decade, all funds would be screened and classified for ESG criteria.
However, before this revolution can take place, the panel agreed that awareness needs to raised amongst clients of the complexity of classifying a fund in this way. “We are seeing a change, with clients moving from an exclusions-based approach, with a shift to seeking to promote improved performance,” noted Ana Harris, global head of equity portfolio strategists at State Street Global Advisors. In other words, a fund could decide to exclude energy firms, transport companies, etc, from its portfolio and present a carbon neutral stance to the market. However increasingly investors (but particularly institutional investors) are coming to realise that real gains come from helping to support companies that are working hard to transition to a lower carbon model.
Honest broker needed
When dealing with institutions, asset managers can sit down with these big clients and go through the complexity of the different investments. But to reach a retail market, some kind of labelling system is needed. Yet for some campaigners the idea of an ESG investment in a transport or fossil fuel energy company is an oxymoron. There is a risk that asset managers could be painted in a bad light.
This has inspired thinking behind the action plan launched by the European Commission in March this year. The strategy document includes suggestions for “a unified EU classification system”, “creating EU labels”, and other nice ideas. While supporting this thrust, the panel were concerned that the commission is taking on a huge task. Indeed this is recognised in that the EU’s civil service is not expected to report on this before 2022.
Nevertheless, the panel demonstrated that the industry is willing to get behind these efforts with the European Commission acting as an honest broker. If they succeed, there is the potential to unlock the power of private investment to transform lives for the better, as well as making financial returns.