ESG at an inflection point

By Morningstar |  03-12-20 | 

At the start of the year, the Macquarie Infrastructure and Real Assets ESG Survey of 150 real asset investors, with a collective $20 trillion of assets under management, found 91% of them expecting to increase their focus on ESG in the next five years. (ESG being an acronym for Environmental, Social and Governance, which encapsulates sustainable investing.)

In a statement, they commented that investors in the real asset sector have reached an inflection point, with a growing consensus agreeing that sustainability strategies can be pursued while delivering value and driving positive change.

More recently, Michael Jantzi, the CEO of Sustainalytics, expressed the same view at the Morningstar Investment Conference.

ESG investing at an inflection point.

It can be summed up in just one word, and that's growth. We're seeing tremendous growth in the interest in sustainable investing.

The growth has largely been driven over the last decade or so by institutional investors, so large asset owners and the investment managers that serve them. And that's really global. There's not a developed market in the world where this isn't gaining traction, and it's driven by the institutional investors saying, environmental and social issues are not just about values. These are real risks and opportunities that need to be looked at alongside the traditional financial analysis that we've always done in the investment side to really position us for good outcomes on behalf of our clients.

We're talking about a sustainable finance ecosystem because companies are also embracing sustainability in a very meaningful way and integrating sustainability metrics into their strategic planning and business planning and raising capital through sustainable investment tools and so on.

We're at an inflection point in part because you have investors and companies looking at sustainability in a new way.

The caution around ESG.

Historically, there has been caution around this space, because people believe that if you're mixing an examination of environmental and social issues into a financial decision-making, for some reason that's going to hamper or lead to a negative impact on returns.

That's been flipped on its head now because, as I said, the growth in this space has really been about integrating environmental, social issues into a process to make smarter decisions, again, to position you better down the road. But we need to do a better job in corporate disclosure on environmental and social issues, and we need to bring some formality and structure to that in the same way that we have a certain level of expectations on financial reporting. And that has been a challenge.

There's been too many different frameworks out there, and it's been voluntary. And I'm encouraged now because that challenge seems to be moving in the right direction. We're now seeing accounting bodies like the IFRS others that are stepping into the fray and starting to say, "Well, maybe we have a role here to bring some structured formality to ESG disclosure at the corporate level." We are now looking at what different stakeholders think, and what the roles of these accounting bodies should be.

The advice around ESG.

This is a tremendous opportunity for investment advisers. Research shows us that clients are embracing sustainable investing in ways that they haven't before, and they're looking at sustainable investing from a number of different perspectives.

There are a number of very powerful drivers now that are leading individuals to want to invest in this way: They believe it informs an investment decision, or will help them achieve a better or good financial outcome, or they will have a positive environmental or social impact with their investing, or they simply want to align their investing with their own values.

We're starting to see significant fund flows in Europe, in the United States, and other markets around the world that reflect this trend.

Investors will look to their advisers to help them reach their objectives. And part of those objectives is around sustainable investing. It's a wonderful opportunity for advisers to step up to the plate and do that.

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