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ESG Factors Driving Change Across The Asset Management Landscape

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Sustainable Investing (SI), the overarching category for ethically focused investment strategies, is not a new phenomenon. Faith-based investing has been around since the 1800s when religious communities such as Methodists and Quakers implemented socially responsible investing guidelines for their congregations. The Vietnam War signaled another boost for ethical investment vehicles in the 70s, when investors started to question how their money was being used. Today, the world we now live in sees the merging of finance and ethics becoming a mainstream expectation, a requirement even. The societal milieu has ultimately led to an explosion of ethics-based and morally-driven investment strategies in the financial services segment and in turn the growth of the ESG investment space.

Environmental, social and governance are the three core factors for measuring the sustainability, responsibility and ethical impact of an investment. Yet ESG is also focused on financial performance and generating positive returns while ensuring investors have the ability to investigate a firm’s policies and procedures regarding ethics and responsibility. ESG investing is different from other SI strategies such as ‘impact investing’ which ranks the result of a positive influence on society and/or the environment higher than the need for financial gain, yet still sees any profit as a positive. ESG’s evenly weighted focus on ethics and profitability means that it fits well into the asset management space in the age of the millennial. It provides an ethical and responsible way of investing while generating returns – dual satisfaction for investors.

The trend is more developed in Europe, but the APAC and Americas regions are also turning to asset managers with ESG competencies. As the need for transparency increases from allocators and regulators, the focus is not only on fees but also operations and governance. As younger investors become increasingly active and influential, ESG certainly fills a requirement. As a result, many

firms are now improving their ability to disclose ESG indicators which often positively impacts long-term profitability. It’s a combination of genuine investment rationale, alongside the need to demonstrate a responsible investment methodology in an increasingly socially and environmentally aware world, that is propelling ESG forward.

Risk factors increase as complexities in regulation, pollution, political unrest, migration, weather disruption, etc. combine. This perfect storm of global change is forcing the investment management space to be fluid and respond accordingly to mitigate those risks. The increasing global nature of asset management only serves to increase the influence of these factors and the subsequent risks, as what might have been previously localized issues become globally impactful as multi-jurisdiction investing and multi-asset strategies increase.

From an economic standpoint the value of ESG can be seen through: i.) Governance scores, or more specifically, poor scores posing a risk to value; ii.) Social scores that reflect diversity, inclusion and ultimately a broader market understanding; and iii.) Environmental factors that reflect a company’s exposure to jeopardizing its energy sources.

Demographic shifts, and specifically millennial buying behavior that is increasingly focused on implementing core values of ‘do no harm’ and ‘contribute positively’ at a societal level, drive underlying value at a portfolio company level and demonstrate why institutional investors globally need to take ESG seriously.

International organizations such as the United Nations are pushing this agenda through initiatives to promote socially focused paradigms. Financial standards have been forced to evolve in the ESG space giving rise to organizations such as the Sustainability Accounting Standards Board whose mission is to help businesses identify, manage and report on sustainability topics resulting in the creation of professionalized standards and measurable outcomes for evaluating companies.

The ESG landscape is continually evolving and it is therefore important to consider three key areas when building ESG into your overall strategy:
1. What are the risks, opportunities and drivers in relation to ESG?
2. Where do ESG factors fit into the firm’s investment philosophy?
3. What knowledge and processes are required to deliver on ESG factors?

In such a rapidly changing environment, success in the ESG space is more about being agile and resilient than sticking to a long-term rigid plan. ESG is an evolving space, good investment decisions rely on data and in order to obtain that data, analysis is required.

The ability to evaluate and assess ESG factors across the portfolio delivers huge value, not only through the ability to understand the sustainability performance of each portfolio company, but also through providing an additional layer of governance and enhanced level of transparency. The ability to accurately measure a portfolio across both structured and unstructured data sets gives managers a competitive edge and forms a critical part of their competitive toolset in the mission toward becoming more socially responsible. Ultimately, ESG supports and drives short-, medium- and long-term values for stakeholders.

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