The rush to stand out and attract clients via ESG investing is well and truly under way. This publication drills into some of the details.

There is a land grab going on among investment and wealth management firms in the environmental, social and governance-driven approach to managing money.

These are still comparatively early days for the ESG investment sector and Asia is probably the youngest one in terms of getting into the act, while Europe and the US are a bit further down the line. Across all regions, firms are scrambling to win a slice of the pie. 

And they want to tell the media all about it. When this publication began exploring the topic, and ran a series of features and articles about it, it was inundated with commentary offers. That was gratifying, but possibly also a cause for caution – could there be some irrational exuberance?

As reported here a few days ago, the jury is out on whether ESG factors make clients better off in the long term, according to Morgan Stanley Capital International, the indexing organisation more usually known as MSCI. Its comments are significant because many fund managers use MSCI indices to compare their funds against others.

With firms such as UBS, Indosuez Wealth Management, BNP Paribas, Cornerstone and Tiedemann Advisors making a noise about their ESG efforts, it looks as though firms are trying to carve out a name for themselves in this area. Even if debate continues over ESG’s merits, wealth managers know that they have to be at the table.

“New investment talent can help drive innovation within the impact investing industry and competition is healthy. That said, we understand the scepticism and have met our fair share of new entrants who are “greenwashing” or “impact washing” as a marketing ploy. For those trying to break through the scepticism, showcase an experienced team, a thoughtful investment strategy, a `theory of change’, and a deep understanding of the systemic social and environmental challenges facing us today,” Tiedemann's managing director and environmentalist, Brad Harrison, told this publication recently. 

So far, interest in ESG is only going in one way as far as wealth industry folk say – and that’s upwards.

“We have observed growing interest from ultra-high net worth individuals and advisors, particularly those based on the [US] West Coast, looking to find ESG solutions for their client base,” Bryn Gostin and Angela Willetts, co-chairs of the responsible investment committee at Capital Dynamics, an international asset manager, said.

“Within the wealth management industry, ESG investments are not currently considered `mainstream’ but as interest continues to grow, wealth platforms are increasingly looking for solutions to meet this acceleration in demand,” they continued. 

“Importantly, the Millennial generation is at the forefront of this shift into more responsible investing and, with trillions of dollars expected to change hands from Baby Boomers to Millennials over the next ten years, the wealth management industry is acutely aware of the importance of embracing best-in-class ESG practices and investment opportunities,” they said. 

Data certainly backs up the growth case. The number of ESG-based assets rose by 37 per cent year-on-year in 2017, reaching $445 billion, outpacing the 23 per cent rise in the MSCI World Index of developed countries’ equities. Twice as many ESG-themed funds were launched in 2017 than was the case in 2014, with exchange-traded funds proving a popular channel, according to the World Resources Institute.

Quality or quantity
There are different ways to play the ESG story, such as taking case-by-case decisions on whether to invest in or avoid a firm, or adapting a more quantitative approach.

“For a long time, SRI [socially responsible investment] strategies were managed essentially by pure discretionary managers with large teams of ESG analysts. This was because the quality and accuracy of the data required a deep discretionary overlay to make them relevant and consistent from one firm to another, which made it difficult for quants to work with this data,” Ayaaz Allymun, head of sustainability of TOBAM, an international asset management firm, said. 

“The development of guidelines and framework such as the TCFD has certainly helped to improve the quality and accuracy of data and now allows quants to enter this field of research. There is more research done with the aim to set up a framework in the G [governance] or S [social] fields which will benefit the industry massively. We are still slightly behind when compared to the work done on the E [environment] part. It is in everybody’s interest to work on accurate and transparent data,” Allymun said. (TCFD relates to Task Force on Climate-related Financial Disclosures.)

Capital Dynamics’ Gostin and Willetts reckon that more wealth managers are turning towards more “quant” ways of playing the ESG game.

“Historically, managers shied away from more quantitative initiatives due to the complexity of measuring ESG credentials, but we are currently observing a trend where managers are utilizing off-the-shelf toolkits or their own in-house designed KPIs to measure ESG more quantitatively. Each manager is monitoring different aspects of ESG but common ESG measurements include such topics as carbon emissions, health and safety record keeping and diversity monitoring,” they said.
 

“We have designed our own in-house ‘R-eye’ rating system to measure initial ESG compliance for our managers and assets in a consistent manner. The ‘R-eye’ scorecard approach is also used to monitor and evaluate year-on-year changes. We believe ESG in ownership is as critical as ESG at entry. Furthermore, we believe our more quantitative approach to ESG measurement and data collection has the potential to better inform our investment decision making over time,” they said.

Regions
TOBAM’s Allymun said that the most advanced regions for ESG investing at present are the Nordics, France and North America. Capital Dynamics also mentioned the Nordic region as being a trailblazer.

In the US, asset management titan BlackRock ($6.32 trillion in AuM) is well placed to use its financial firepower to force ESG changes, although an organisation tracking this sector recently gave the listed firm a mixed report card.

Allfunds, the fund distribution platform business that has recently pushed into Asia, argues that demand for ESG investing is rising but acknowledges that Asia is “still in the early stages as it started from a very low base of demand”.

Data
Information is expanding all the time to help managers work out where investment opportunities are – and areas to avoid at all costs. A few weeks ago, fund-tracker firm Morningstar published its annual Morningstar Sustainability Atlas, which shows how well the companies held by a fund are managing their ESG risks and opportunities compared with similar funds (See here.)

Information quality and availability is crucial to making ESG work, both in public listed markets and private ones, practitioners said. Sometimes data can be patchy. 

With listed markets being easier to enter in some ways than private ones, is there a danger that ESG approaches could favour the former, producing an overweight stance? 

Capital Dynamics doesn’t think so. 

“In general, we consider change to be more easily enacted in private markets than in other markets, such as listed equities. To date, change has enabled value creation within private market assets resulting in the asset class largely outperforming its public market counterparts. ESG value levers are additional tools in the value creation toolkit to enhance stakeholder value for privately held assets. Private market managers are recognizing this ‘ESG opportunity’ to enhance value more and more,” Gostin and Willetts said.

Clients ask for it
Clients are also starting to initiate requests for ESG investment options, while in the past they conversation usually was initiated by advisors, Ben Constable-Maxwell, head of Sustainable and Impact Investing, M&G Investments, said.

Previously, we used to be the ones who raised the subject, but are now increasingly being asked about ESG by both institutional and retail clients on how we are integrating ESG into investment analysis and stewardship activities.

Constable-Maxwell ws asked how hHow should a manager go about framing expectations of clients about the monetary returns that ESG investing makes possible and whether the sector has gone beyond the idear of ESG/returns tradeoffs.

"We think we’ve gone beyond this. There is more academic and statistical data showing that there is no performance drag to strategies that incorporate ESG. Indeed a meta study from Deutsche Bank showed a positive link between high ESG standards and corporate financial performance. We hold the view that better informed investors make better investment decisions," he said.

Omar Slim, Senior Vice President, Fixed Income, PineBridge Investments, also addressed the issue of if there is any trade-off between investment results and ESG approaches.

 The tradeoff between ESG and making money is often an imaginary one, not backed by conclusive empirical evidence. Systematically integrating ESG consideration in investment decision making is not only `the right and nice thing to do for our environment and society”. It is also the right way to have a holistic analysis of risks facing a company', he said.

"Simply put, you won’t know what you’re investing in if you don’t know and can’t evaluate the risks involved. For instance, a management capable of coherently articulating their business risks and how they mitigate them is clearly one that give confidence to investors. Frequent worker disputes, a board of directors that looks like a family gathering, a company which activities pose a serious threat to the environment are all ESG related red flags to us," he continued.

"But those are first and foremost investment related red flags. A company that produces hazardous material could have financial liabilities affecting its creditworthiness. Another one that has acrimonious relations with its workers could have frequent production disruptions, affecting its profitability. Having said that, ESG and investment analysis should be put within context and customized to the type of companies at hand. It also means that while quantitative favors are important, it is also important to qualitatively assess the companies, by knowing management and doing some commonsensical background research," Slim added.