Millennials put ESG on par with returns

Schroders’ Global Investor Study 2016 shows the millennial generation ranked environmental, social and governance (ESG) factors equally as important as investment outcomes when considering investment decisions, with 91 per cent of millennials more likely to stay invested in a positive ESG investment for longer than usual compared to those aged over 36. 

Jessica Ground, global head of responsible investing at Schroders, says: “Investor interest in ESG issues looks set to grow given its prevalence among millennials.  While returns are still the main issue, ESG’s importance to end investors means these factors are too big for any adviser to ignore. It is important investors recognise the value of being invested for the long term and this is especially relevant when considering ESG factors.”

With growing demand for these types of investments, it is unsurprising that more tools are being developed to help advisers and their clients choose the right investment. 

These include the Morningstar Sustainability ratings, launched in January 2016, while MSCI expanded its ESG research into the mutual and exchange-traded fund spaces with its MSCI ESG Fund Metrics, which rolled out from March this year. The Global Initiative for Sustainability Ratings shows there are 605 products globally that provide indices, ratings or rankings using ESG factors. 

Jon Hale, director, sustainability research at Morningstar, says: “Increasingly, investors are looking for insight into the sustainability performance of companies because it makes sense to consider these factors from a material, financial standpoint. Many investors also want to align their portfolios with their preference for companies that treat the environment and their workers well, produce safe and useful products, and govern themselves with transparency and a long-term view.

“We created the Morningstar Sustainability Rating because of this rapid growth of interest in sustainable investing and because investors needed a tool to help them evaluate, select and monitor funds. Many of the world’s largest companies now explicitly consider sustainability as part of their long-term business strategies and a growing body of research suggests correlations between better company ESG performance and higher quality management, higher growth and lower cost of capital. We also have evidence that sustainable investing can deliver good investment performance.”

The term sustainability, however, can cover a broad range of issues, and the different approaches that investors can have means not everyone agrees with the methodologies of the tools currently available. 

Meg Brown, director at Impax Asset Management, notes: “We welcome any new developments that take account of ESG metrics and raise awareness of these issues with investors. However, it is critical new methodologies are comprehensive to give investors a meaningful picture.   

“The ESG ratings by some of the leading agencies are a step in the right direction but they fall short of providing investors with an optimum methodology with which to assess the true sustainability criteria of their funds. Their approach is oversimplified and has not created a level playing field. It appears to favour a ‘best in class’ approach with its significant reliance on negative screening – but totally overlooks positive inclusion criteria. Sustainability opportunities do not receive enough weight with this ‘one size fits all’ approach.” 

Lewis Grant, senior portfolio manager, global equities, Hermes Investment Management, points out the team has been working on including data on ESG factors for a number of years, highlighting “back in 2008 it was pretty much impossible to do, there was nothing that had comprehensive coverage or history”.

He adds: “It wasn’t until 2012-13 that we felt we had sufficient data from commercial providers to produce a score. Even then what we found was there was no one provider that had all the answers. They all have their own strengths and weaknesses. We tend to combine data from lots of different providers. 

“One of the things a lot of commercial providers, indices and tools haven’t captured as much is companies that are trying to get better, with management that are starting to appreciate ESG issues.”

Mr Grant continues: “The methodology isn’t perfect, but people will always be trying to improve the way it’s done and provide more transparency to investors. Once we can get beyond a single rating that says a fund is good or bad and give investors more granularity on why a fund is good or bad that will be fantastic for everyone.”

Nyree Stewart is features editor at Investment Adviser