Magazine Issues » October 2019

Opinion: Making the ESG case, again

Fiona_RintoulThe world seems to be turned upside-down right now. A gimlet-eyed teenager looks more focused and mature than the septuagenarian US president. The UK Conservative party doesn’t seem to want to conserve anything. Europe’s powerhouse economy of Germany may be limping towards recession.

Throughout it all, there is one theme that won’t go away; it is Swedish 16-year-old Greta Thunberg’s passion about climate change. And the gulf in attitudes, crystallised in a thunderous look from Thunberg to Trump at the United Nations in New York in September, is mirrored in the investment industry.

My inbox is overflowing with information about new ESG products and initiatives. In the retail market, Interactive Investor has launched the UK’s first rated list of ethical funds, ETFs and investment trusts for investors seeking to align their investments with their personal values. In the institutional market, Invesco reports that environmental, social and governance (ESG) investing is gaining traction among sovereign investors and central banks, with 60% of sovereigns incorporating a top-down ESG policy, up from 46% in 2017. But if you think the case for ESG investing had been made, think again. A recent survey on ‘Investor Sentiment: Responsible Investing’, commissioned by NN Investment Partners, found that more than half (52%) of investors still believe that an ESG approach to investment decisions will hurt their returns. Scepticism is highest in Germany (80%), Italy (75%) and the Netherlands (71%).

This scepticism is shared by the Trump administration, which recently moved to constrain the development of sustainable investment by large pension funds in the US. The Department of Labor stated that the funds’ primary aim should be to deliver returns, and that ESG considerations should be subordinated.

It is another example of “the US pushing against the tide when it comes to trends in global finance”, says Paras Anand, head of asset management for Asia-Pacific at Fidelity International. The administration is also considering ways to restrict flows from US portfolios into China at a time when China is internationalising.

In Anand’s view, both moves are ill-judged – and defy financial sense. On the move to constrain ESG for pension funds, he says: “The global trend of incorporating sustainability factors into investment strategies is arising precisely because most market participants believe that it will help enhance long-term returns.”

That this must continually be restated is telling. Kames Capital makes broadly the same point in a press statement on the ‘Four myths about responsible investing’. The fourth is that “investing responsibly means giving up returns”. Its head of ESG research, Ryan Smith, says: “Academic studies increasingly disprove this.”

But somehow the message doesn’t stick. Perhaps it all comes back to that icy stare Thunberg gave to Trump. Her generation is feeling the fear. For them, climate change is a visceral threat in a way that it isn’t for the much-derided baby boomers.

If that is the case, we must look to the next generation of investors to still the voices of dissent around ESG. A report on the future of European financial services from PwC Luxembourg in conjunction with Luxembourg for Finance suggests that they will. Millennials will soon become the dominant demographic in the consumer population and sustainability is high on their agenda. “In the future, we believe that almost all financial services products will be sustainable,” the report says.

Someone tell Mr Trump.

Fiona Rintoul is editor-at-large at Funds Europe

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