ESG investing trend gains momentum

This article is part of
Spring Investment Monitor – March 2016

ESG investing trend gains momentum

No longer the preserve of those willing to sacrifice returns to ‘do good’, investing with a purpose –be it sustainable, ethical, responsible, or with environmental, social or governance (ESG) aims in mind – is becoming a more accepted way to allocate money.

Underlining this trend, Morningstar earlier this month launched the industry’s first sustainability rating for roughly 20,000 funds based on ESG factors, while Whitechurch Securities recently announced the launch of a range of ethical, discretionary-managed multi-asset portfolios in response to rising interest.

Jon Hale, newly appointed head of sustainability research at Morningstar, says: “Many investors are interested in sustainable investing but are unsure how to put it into practice. Our new rating makes it easier to compare funds based on their ESG attributes. In that way, investors can better determine how to incorporate sustainable investing into their portfolios, or assess the extent to which their investments are upholding best sustainability practices.”

Climate change and financial stability

In a speech at Lloyds of London in September 2015, Bank of England governor Mark Carney highlighted the risks that climate change poses to financial stability:

“There are three broad channels through which climate change can affect financial stability: Physical risks: the impact today on insurance liabilities and the value of financial assets that arise from climate- and weather-related events, such as floods and storms that damage property or disrupt trade; Liability risks: the impact that could arise tomorrow if parties who have suffered loss or damage from the effects of climate change seek compensation from those they hold responsible. Such claims could come decades in the future but have the potential to hit carbon extractors and emitters – and their insurers if they have liability cover – the hardest; Transition risks: the financial risks that could result from the process of adjustment towards a lower-carbon economy. Changes in policy, technology and physical risks could prompt a reassessment of the value of a large range of assets as costs and opportunities become apparent.

“The speed at which such repricing occurs is uncertain and could be decisive for financial stability. There have already been a few high-profile examples of jump-to-distress pricing because of shifts in environmental policy or performance. Risks to financial stability will be minimised if the transition begins early and follows a predictable path, thereby helping the market anticipate the transition to a 2-degree world.”

This growing interest can be attributed to a number of factors, including a renewed focus on climate change in the wake of COP21 in December 2015.

But while the biggest shift in recent years has been away from traditional negative screening to positive screening, engagement and impact investing, the range of jargon can be a headwind for investors, with many unclear as to what the terms mean.