Many of the nation's largest fund managers are tracking environmental, social, governance (ESG) factors when determining their investment strategies.
Emily Bannister, director of research at Boston-based Federal Street Advisors, says asset management firms are taking ESG, also often referred to as socially responsible investing (SRI), into account when researching performance because of an increased investor demand for platforms with companies that rate well with certain social causes such as climate change and shareholder activism. Bannister also emphasized that ESG has evolved to the point where investors want to reward companies for rating well with ESG factors rather than negative screening. She also points out that returns on ESG platforms have also improved in recent years.
"We do see a lot of investors who are looking for more sustainability options and a lot of it is both mission-driven but also performance-driven," says Bannister. "We're seeing strong performance and sustainability is often going hand in hand."
The number of socially conscious mutual investment products that are ESG-focused has risen steadily in the last seven years from 199 total funds in 2007 to 277 in 2013 through Oct. 31, according to data provided by Morningstar. With increased sustainability research at large money managers also comes further marketing efforts. Baltimore-based T. Rowe Price Group, which has $692.4 million in assets under management as of Dec. 31, 2013, has devoted a page on its website outlining support for EGS investment procedures.
"We've seen growing client interest in sustainable investments and many asset managers who include ESG factors in their analysis are highlighting their approach as a selling point," says Bannister.
Turning Point
Bannister says a major turning point for the asset management industry's increased focus on utilizing SRI and sustainability research was the United Nations-supported Principles for Responsible Investment Initiative launched in April 2006 at the New York Stock Exchange. Signatories to the PRI now include 267 asset owners and 796 investment managers with many of these companies adopting formal sustainability research practices, according to Bannister.
"The UN PRI provided a forum where institutional investors could share insights on the best ways to incorporate sustainability into an investment process, so there was suddenly an organized network of peers working on the same issue, rather than a group of investors each trying to think on its own about how to incorporate ESG research," Bannister explains. "The early adoption by a number of large mainstream asset managers provided legitimacy for many more organizations to dedicate resources to sustainability research.
MFS Investment Management became a PRI signatory in 2010 and formed a Responsible Investment Committee. The Boston-based asset manager stepped up its ESG research practices last year with the hiring of Rob Wilson as an institutional portfolio analyst, who also serves on the MFS Responsible Investment Committee.
"The amount of disclosures and transparency that is being asked of companies is increasing," says Mike Cantara, co-chair of MFS's Research Investment Committee on why ESG research has increased in importance recently.
Improved Reporting
Another catalyst leading to more SRI research from fund managers is having more information on SRI trends at their disposal thanks to companies like Bloomberg and MSCI implementing platforms that provide analysis on sustainable investing, Bannister explained.
"Data that has been available in this area has improved a lot in the last five years," says Bannister. "Providing data that is widely available and standardized across companies allows asset managers to compare companies on measurable statistics and evaluate which statistics might impact financial performance."
MFS selected MSCI as its third party research provider for ESG analysis last year. Wilson says third party platforms help bolster a fund manager's understanding when making investment decisions based on ESG analytics.
"There is real investment infrastructure being built in the ESG space," says Ron Cordes, executive co-chairman of Concord, Calif,-based AssetMark, which provides investment platforms to around 4,000 financial advisors. "These firms are taking notice of this and building infrastructure because they seem the demand in this space."
Advisor Demand
AssetMark is responding to the growing demand for ESG offerings and is planning on launching new SRI funds in 2014. Cordes says that AssetMark advisors have communicated the importance of adding ESG options due to increased client requests. AssetMark began working toward its new SRI focus in 2013 when the company changed its name from Genworth Wealth Management following an acquisition by two private equity firms.
"Investors are increasingly going to their advisors asking for us to include [ESG funds] in their portfolios," says Cordes, who authored "The Art of Investing & Portfolio Management" in 2004. "[Advisors] are saying that their clients are interested in incorporating this into investment platforms."
MFS is projecting that ESG research will become the norm for asset managers in years ahead. "We have to take into account risks that each company faces," says Wilson. "It just becomes part of the overall research process."
