With Davos 2019 taking a closer look at sustainability, the ‘Global Markets Forum: The future is now’ blog series attempts to untangle some of these challenges. It is a pivotal time in the world of environmental, social and governance (ESG) investment. For the evolution to continue, high quality, independent data is required. What are the prospects for the year ahead?
- As we continue into 2019, the ESG investment universe is moving through a transitional phase.
- While companies are increasingly able to quantify their actions on ESG issues, not many are able to translate this information into what it means to the business financially.
- Improvements in that regard will be powered by continued innovation, stronger regulation and tougher systematic market risks hitting closer to home.
The ESG investment universe is in a transitional spot heading into 2019.
On one hand, the past year has marked a time of record inflow into funds and products that promote good environmental, social and governance (ESG) practices at investee companies. But legislators and other market movers are still underestimating the impact of such factors on the long-term health of not just financial markets, but wider society and the planet as a whole.
Companies increasingly are able to quantify their actions on ESG issues but not many can turn this information into what it means to the business financially. In turn, this means that companies and investors are not monetizing the full values of the sustainability business case.
I expect many improvements in that regard in 2019, powered by continued innovation, stronger regulation and tougher systematic market risks hitting closer to home.
ESG progress
For Cyril Blanchard, Refinitiv’s Market Development Manager in Continental Europe, the progress made last year is cause for celebration. He points to moves such as Amundi’s decision to generalize its ESG criteria, or the fact that 253 new companies signed up to the UN’s Principles for Responsible Investment in 2017, according to the organization’s 2018 annual report, representing the addition of $82tn of managed assets.
A mainstream movement
The European CFA Institute conference held in Paris in November was also a landmark moment in 2018. “ESG was one of the main topics on the agenda,” Cyril explains. “Some 56 percent of attendees reported that they consider now ESG a mainstream practice and not an alternative asset class anymore.”
This mainstream move is a trend that many predict to continue into 2019, including Birgit Hermle, Market Development Manager in Continental Europe for Refinitiv. She believes ESG factors will become a top priority for asset managers across the spectrum.
“There’ll be no investments made in companies who don’t fulfill the set environmental requirements for investment, for the reason of reducing risk,” she says. “There may even be transactions which lead to disadvantages for minority shareholders.”
This refocusing from asset managers will be somewhat led by millennials, who are more switched-on to environmental and social issues than their predecessors and thus more ESG investment. As the intergenerational transfer of wealth switches capital over to such investors, asset managers will correspondingly increasingly focus on ESG issues.
Shareholder rights
Barnabas Acs, Market Development Manager in Europe North at Refinitiv, predicts that Northern Europe’s focus in 2019 will be on “higher activity in shareholder rights management”, particularly how ownership information, activist investor data and ESG metrics are handled.
“There’ll be more scrutiny of the public and regulators,” he continues. “ESG factors will increasingly be used to support wealth management decisions and transparency.”
Paul Hewitt, Market Development Manager in AsiaPac, sees similar forces at present in the East. Since the Japanese Pension Investment Fund, otherwise known as the Government Pension Investment Fund (GPIF), signed up to the UN PRI in 2015, inflows into responsible funds in Japan have accelerated: in the last year, the value of ESG-integrated funds in the region has grown by 182 per cent.
“Asia is very difficult to generalize, as each market has its own priorities and are at different stages of incorporating and integrating ESG considerations,” Hewitt adds. “But the rise of index funds is driving the importance of corporate governance. These funds are in for the long haul with companies, and are seeking greater voting rights and increasing board engagement to drive sustainable long term growth.”
ESG investment products
Private equity is another trend on the horizon in 2019, with an increasing number of private asset managers taking green issues more seriously in particular. New ESG products are also expected in the next 12 months, following innovations such as Credit Agricole’s green bond emission, which was introduced last year.
Acs also points to more “thematic” products, like resource protection funds or diversity and inclusion-focused instruments, coming to the fore, as could further refinements of existing sustainability staples, such as fund ratings and the quality of ESG data.
In-house sustainability
“In Canada we are seeing a trend where asset owners are becoming even more sophisticated with their in-house sustainability talent,” says Hugh Smith, Investment Management Specialist at Refinitiv.
“This has created the need for more raw, transparent, auditable ESG data, rather than ESG ratings or opinions provided by a third party, for the pensions to use to derive their own opinion about the sustainability of a holding or potential investment.”
We are also beginning to see this demand for data trickle downstream from the asset owners to asset managers hoping to win their mandates, then on to corporations hoping to attract investment from asset managers, and to sell-side research houses hoping to engage with their buy-side counterparts.
If the industry and practice of ESG investing is to continue this evolution in 2019, real quality has to be driven from within — starting with the availability of quality, independent data by which accurate and important investment decisions can be made.
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