Looking behind the definitions as clients demand grows

Pioneers like WHEB and Impax within the asset management industry, and others in the discretionary space, are providing evidence in their respective impact reports of the difference that investors can make.

Key Points

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  • The difference between the ESG, impact and sustainable investing can depend on how much an investor wants to achieve
  • ESG screening is a  simple way to tilt investments while impact is more aligned to achieving UN goals
  • Fund documents still have a long way to go in terms of disclosing ESG ratings of the underlying holdings

Socially responsible investing

Socially responsible investing can be a catch-all phrase hence the difficulty in defining it, but one can see some differences between passive and active fund management groups. Within the passive industry, socially responsible investing usually means building a portfolio based on ESG ratings and sometimes using a form of exclusion regime.

However, the unwillingness to improve corporate practises through engagement is disappointing, despite the big headlines made by Larry Fink, BlackRock’s chief executive.

In 2016, BlackRock and Vanguard, two passive giants and shareholders, supported more than 90 per cent of the proposals made at companies’ shareholder meetings and voted against most climate change-related proposals. 

While there was some progress made in 2017, engagement is a lot more embedded within the process of actively managed socially responsible funds. 

These groups also tend to go further in their stock selection by combining ESG leaders with companies making a positive impact through their products and services, but the degree of intentionality varies strongly from one fund management group to another. 

A number of socially responsible actively managed funds still support fossil fuel companies and need to be aware of investors changing behaviours.

Future state

While the wide adoption of ESG analysis by asset managers over the last 10 years find its roots in enhancing risk management and performance, the recent increase in ‘sustainable’ fund launches is definitely more client driven.

According to the 2015 Nielsen Global Corporate Sustainability Report, 66 per cent of global consumers say they are willing to pay more for sustainable brands and 73 per cent of millennials are willing to do so. 

While there is a growing interest from investors of all ages, millennials in particular want their investments to reflect their social and environmental values.

According to a survey published by Morgan Stanley, 86 per cent of polled millennials are either very or somewhat interested in sustainable investing and 61 per cent of them have taken at least one sustainability oriented investment action in the last year. 

With $4tn (£2.9trn) expected to be transferred within a generation in theUK and North America alone according to Royal Bank of Canada, it’s no surprise that we have seen a number of banks setting up sustainable and impact departments.

Unfortunately, the financial crash and the volatility of the markets have led to a state of general distrust towards financial institutions, especially among the millennials.