The assessment of ESG factors has generated a great deal of noise in the investment world, especially over the last five years. By Chris Corkish
It is an emotive topic of debate in asset manager circles as the rush to integrate screening and analysis into traditional stock selection methods has led some to question whether some managers are simply paying ESG lip service.
The term ‘greenwashing' has been used to describe the behaviour of some asset managers whose ESG credentials are not as strong as they profess.
The perception of responsible investing as something ‘fluffy’ and insubstantial has largely disappeared."
One aspect of ESG integration that is at the core of many of these accusations is what is termed ‘active ownership'; that is, using shareholder rights to influence company behaviour and enforce positive change. Asset managers are often in a position where they hold large consolidated positions in companies and can use their financial muscle to promote positive behaviours.
The problem is that some managers have shown poor proxy voting records over some ESG related issues. This is difficult to justify, both from the perspective of their promotion of ESG integration to their processes but also as getting ESG issues right has been established as being crucial for long term sustainable growth.
The inexorable growth of ESG is reflective not just of the development of the social conscience but also as a pragmatic risk mitigation tool. The perception of responsible investing as something ‘fluffy' and insubstantial has largely disappeared and been replaced with an awareness that inevitable changes in the way the world is governed and regulated will mean poor behaviours are sanctioned financially and potentially criminally.
The perception of the need to sacrifice returns to invest responsibly is also disappearing; recent studies have shown that ESG integration can provide resilience and outperformance.
RL360 is integrating the Morningstar Sustainability Rating into the fund centres available to products with defined fund ranges on our websites; this rating is based on analysis provided by Sustainalytics, a leading provider of ESG research, and enable advisers and plan owners to understand how funds available to their product, or in their portfolio, are rated for ESG by reference to the companies they invest in.
We are also adding a number of responsible investing funds to the defined fund ranges available to our savings, investment and protection products, from asset managers with proven credentials in ESG.
ESG may be generating a lot of noise in the industry but we believe the benefits are tangible and therefore it will be a feature of asset selection into the future. We also believe that investing responsibly can now be done with the head as well as the heart.
Chris Corkish is investment marketing manager at RL360.
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