Nicolo Bragazza, investment analyst, portfolio management at Morningstar Investment Management Europe, explains: “It would be too optimistic to think that ESG is the investors’ philosopher’s stone, able to automatically give them the power to find good businesses with the potential to thrive in the future.
“Sectors such as the tech sector and alternative energy are not immune from ESG risks. Specifically, even if not exposed directly to environmental risk, many tech businesses have issues with data privacy and cybersecurity, or they may face scrutiny from governments with regards to anti-competitive behaviour and taxes.”
Within the past few years there has been an explosion of different strategies coming to market, allowing investors access through fund-based solutions.
There are varying degrees of exposure across the spectrum of capital, ranging from negative screening and general ESG risk integration, through to sustainable and more specialist impact strategies.
As a result of improving company disclosures, data on ESG investments is increasingly being made available to investors, helping them to identify and understand how sustainable a company is.
However, critics argue that the lack of a widely-used standard for ESG metrics means the door is wide open for greenwashing.
Declan McAndrew, head of investment research at Foster Denovo, says investors should adopt a healthy scepticism and scrutiny over whether funds are doing what they say on the tin.
He adds: “Greenwashing has become more prevalent amid a trend of managers simply rebadging legacy funds with a new sustainable label to attract investor interest.
“Our role as an adviser is to help them navigate this landscape and ensure they are accessing solutions that are both credible and going to contribute to achieving their long-term goals and ambitions – be that financial, moral or ethical.”
Kristina Church, senior investment strategist, sustainability at Lombard Odier Investment Managers, notes: “ESG metrics do not always provide enough data to identify the most sustainable companies over the longer term, and that many technology companies are growing their carbon footprints as demand grows.
“It is vital to move beyond basic, exclusionary ESG metrics to full sustainability integration, with a focus on forward-looking, judgmental analysis of company business models in order to understand which companies are ready for a more sustainable future.”
Research by Morningstar suggests that companies which embrace low-carbon technology and treat their employees fairly are more likely to be future-proofed and have consistent cash flows.
Meanwhile, a separate study from HSBC found that ESG issues make up an estimated average of 43 per cent of the key medium-term financial performance drivers.
So could investing in the industries of tomorrow help future-proof clients’ investments?
Ms Church says companies that do not reduce their carbon emissions may find it hard to be profitable in the future.