So often, I hear the sentence: “It’s impossible to integrate ESG (environmental, social and governance) factors without sacrificing performance.”
I spend a lot of time talking to fund managers and it’s astonishing how often this view is expressed.
At a time when even the meaning of ESG is still evolving, a significant number of investors have no hesitation stating that this “stuff” not only has no positive impact on performance, but actively harms it.
Far safer to stick to the hard numbers.
Partly this view is so prevalent precisely because of the confused terminology. Ask a fund manager if he or she looks at the ESG aspects of their portfolio companies or considers 'responsible investment' and the answer is likely to be no.
Ask if they consider management succession planning, corporate culture or political risk – to name just a few of aspects of what is often referred to as responsible investing – and it’s far more likely to be a yes.
But there’s also a perceived dichotomy between investment performance and principles.
As a result, many in the industry see a stark choice between getting a return on your investment or saving the planet.
Put that way, it isn’t surprising that so many fund managers, asset owners, individual savers and those who advise them choose to exclude consideration of ESG factors.
A warm glow of righteousness does not pay pension liabilities, hence ethical fund investing remains, largely, a niche retail offering for those who can afford it.
There is another way, however – one which doesn’t involve a trade-off but sees ESG as an additional lens on a company’s financial performance.
Understanding the full spectrum of long and short-term risks that companies face simply enables better investment decisions.
It gives a sense as to whether a firm’s business model is sustainable – in the sense of being fit for the future – and able to withstand social and regulatory headwinds.
It can also give investors a clue as to management quality. If the chief executive is overlooking a big environmental risk, for example, what else is being missed?
Of course, none of this is a magic bullet but more information must be a good thing.
The best investors are always looking for a different angle or information that nobody else has.
At a time when ESG performance is not yet accounted for in a company’s share price, this seems an obvious place to look.
More progressive fund managers are already on the case, encouraged by growing interest from their clients, particularly millennials, who are looking for something very different from their predecessors.
Today’s customers are more demanding, both in terms of the advice they receive and the products they buy. They expect their fund managers to take account of a broader range of issues and financial advisers need to understand this trend.