ESG focus doesn’t mean slack returns

The COP21 conference in Paris in November 2015 culminated in the Paris treaty, which has been signed by 175 countries. Liam Kavanagh, chief executive of Rockfire Capital, believes the regulatory framework at UK, European and international levels is helping sustainable investing gain recognition.

“With the endorsement of the Paris agreement, governments around the world will be obliged to drive down their national greenhouse gas emissions, creating optimal conditions for developers and promoters of clean technologies,” he explains. “As Britain prepares to leave the EU and become less dependent upon imported energy, and as the cost of producing renewable energy falls closer to the wholesale electricity price, there are compelling market motives for investing in storage, waste-to-energy or any one of the alternative forms of energy generation currently in development around the UK.”

Awareness of environmental, social and governance (ESG) factors has been brought sharply into focus by several high-profile cases, including that of carmaker Volkswagen after the company’s emissions testing inaccuracies came to light. When US coffee chain Starbucks and telecoms provider Vodafone attracted strong criticism for minimising their UK tax bills, it prompted many investors to pay more attention to companies’ moral compass and how it may affect their performance.

Ben Matthews, investment manager at Heartwood Investment Management, says: “Well-managed businesses with good sustainability track records are less likely to be involved in corporate scandals. We believe socially responsible investment (SRI)/ESG screening can benefit performance by helping to avoid these types of event-risks.”

It also helps put paid to the idea that ethical or sustainable investing is a negative screening process.

Mr Matthews adds: “Performance is not necessarily sacrificed; gone are the days of clumsy screening and excessive biases. In fact, SRI screening can enhance returns due to the benefits of investing in companies that score well on factors such as good corporate governance. MSCI SRI indices have done well against the standard indices since their inception.”

One of the biggest drivers of the interest in sustainability and responsible investing is the supposed influence of the demographic group known as the ‘millennials’. These are the generation born between around 1980 and 2000, making them aged between 16 and 36. According to Jupiter Asset Management’s Abbie Llewellyn-Waters, this group now accounts for 25 per cent of the world’s population. 

At a recent briefing on sustainable investing, she quoted figures from Bank of America Merrill Lynch that predict, together with generation ‘z’, millennials (generation ‘y’) will triple their share of global gross income from $21trn (£17trn) in 2015, to $62trn in 2030.

Ms Llewellyn-Waters, who co-manages the Jupiter Global Ecology Diversified fund, observes millennials are not just demanding financial return but want their investments to represent their values – a priority only shared by around half of the baby boomer generation.

Matt Christensen, global head of responsible investing at Axa Investment Managers, says: “The millennial generation is bringing a different and more holistic approach to investment. These investors are becoming increasingly interested in the sustainability of their investments and whether they can use investment to do good – contribute to the transition to a low-carbon economy or, for example, ensure their investments have measurable social benefits. They want to be able to utilise the power of their capital towards a demonstrably better world.”

Eric Cockshutt, responsible investment coordinator at Unigestion, believes there is another important demographic driving uptake of such funds. He describes this group as the “newly retired, more affluent and well-educated pensioners who have the time and interest in looking at how their plans are investing with regards to ESG factors”. 

“They are thinking about the legacy they leave behind, both in terms of assets and the state of the planet,” he adds. 

The next challenge for asset managers is convincing millennials and older generations to invest a significant amount in sustainable funds. If the industry can capture the interest of generation y and beyond, then sustainable investing may finally become common practice.

Ellie Duncan is deputy features editor at Investment Adviser