The rise of environmental, social and governance (ESG) mandates from investors are becoming increasingly integral to the investment process.
A new whitepaper on Responsible Investing from CAMRADATA, delves into what pension schemes, consultants and asset managers are doing when it comes to responsible investing – and the positive impact their combined efforts might have on the financial and social wellbeing of people, and on the planet.
The whitepaper includes expert insight from guests who attended a virtual roundtable hosted by CAMRADATA in June. Participants included Candriam Investors group, Newton Investment Management, Union Bancaire Privée, Cambridge Associates, Canaccord Genuity Wealth Management, Hymans Robertson and Transport for London.
Sean Thompson, Managing Director, CAMRADATA said, “There are many global issues to solve – from the climate, energy and water crises, to social improvement and better governance in order to ensure fairer outcomes, and this means that responsible investing is here to stay.
“Capping the global temperature rise to 1.5 °C is an issue of utmost importance for human survival and an imminent priority. However, to arrest increasing carbon emissions, strong governance and management is vital in the execution of responsible investing. All parties, including the developed nations, must take their allocated seat at the table while investors responsibly allocate the right assets for long-term returns which are built on stable foundations.
“Our roundtable experts considered what the global lockdown has taught investors about ESG, how responsible investing has developed over the years and the ESG criteria for selecting companies, and what the future might hold for investors.”
The key discussion points included how the pandemic has shone a light on the Social element of ESG, key themes and future trends, the criterion for ESG portfolio construction, the importance of governance and thoughts on Stewardship.
The experts acknowledged that investors need to move faster to tackle the world’s problems, noting that finance as a sector had a tendency to detach from the wider world and disappear into itself.
Key takeaway points were:
- The pandemic has highlighted the Social element of ESG and how human capital gets managed. As one panellist said, “Many companies say: “Our people are our greatest asset.” This year we have seen who actually means it.”
- Fifteen years ago there was ethical investing and negative screening. Companies either passed or failed the initial sorting and portfolio construction proceeded from there. Now Responsible Investing has become much more holistic, pervasive and positively-orientated.
- Typical issues today are which companies contribute to a circular economy (an economic system aimed at eliminating waste and the continual use of resources) and which companies adapt best to renewable energy.
- The fact that wind and solar power can now compete in many markets without subsidies is a sign of widespread adoption and technological improvement.
- One expert noted that their clients were enlightened by what they saw at the start of the year, a reinforcement of sustainability megatrends, and added to existing positions.
- There was a confirmation of themes such as telehealth. The only difference was that some of these themes came to fruition over a matter of months rather than the next few years. Overall the crisis had shown that sustainable funds can survive a downturn.
- However, it was noted that private sector defined benefits schemes have been somewhat slower to direct money towards responsible investment strategies.
- More nuance is required around governance. Fifteen years ago there were several fast-growing companies in the renewables space with great business models that came unstuck because of poor management.
- ESG analysis was biased towards large caps, which meant that small caps remained something of an unknown quantity
- In spite of the extraordinary reductions in carbon emissions as a result of economic lockdown, this year’s figure may still be higher than the annual target to restrict rises to 1.5 degrees above pre-industrial temperatures.
Sean Thompson, Managing Director, CAMRADATA added, “Our experts concluded that if we return to business as usual, the outlook is bleak. We need emission cuts of 7.6% a year on average for this decade to limit global warming to 1.5 degrees. This is a sobering reminder there is much more for responsible investors to do.”