ESG and Sustainable investment

Sam Adams of Vert Asset Management, presented on sustainable and ESG investment marketplace.  There appears to be a mismatch between investors who are very interested in sustainable investing and advisers who have little or no interest and part of the reason for this is the conviction by advisers that by introducing the sustainable or ESG criteria the returns may be compromised.

It is also true to say that most advisers are not comfortable talking about sustainability partly because they don’t have confidence around the issues concerned but also they fear that if they start to question clients around these issues then the clients may put so many restrictions on what they do and don’t want to buy, that investment management may become incredibly compromised or indeed the adviser may not be able to help at all.  This is particularly true of the GAIA members who believe in low cost broad global diversification and systematic implementation of investment portfolios.

It is also true to say that most ESG and sustainable investing has no direct impact as ultimately the most investment is buying second-hand shares and the framework for defining sustainable risk investing which may prove very useful in identifying the spectrum of this style of investing ranging from conventional financial first investments through to impact investing. 

In practical terms most clients’ money will be invested in the value driven part of this spectrum ensuring that a competitive financial return is achieved whilst expressing their values through their investments.  Usually, if an investment is more impact focussed then some give up in return should be expected and in some cases attractive tax reliefs can be granted, this style of investment is more like private equity or venture capital and is not to be confused with mainstream portfolios but could be a satellite holding where a client is particularly values driven.

It is apparent that some of the world’s largest pension funds, including government pension funds, now include ESG investing and this is partly driven by the improvement in the data and the academic research.  The Oxford meta study from stockholder to stakeholder show that 90% of studies show that sound ESG standards lower the cost of capital to the companies involved, 88% of studies showed that sold ESG practices result in better operation performance and 80% of studies show that stock price performances is positively influence by good sustainable practices.

The Deutsche Meta-Study: ‘Aggregated evidence from more than 2000 empirical studies’

showed that 90% of studies show significant correlation between ESG and corporate financial performance.  It was also noted that since 30 November 2009, the MSCIACWI ESG index had slightly outperformed the MSCIACWI index with almost identical volatility.

Sam then covered the question of whether there is demand for this type of investment and people often ask themselves – “I am part of the problem or I am part of the solution” and identified the trend to put your money where your mouth is in everyday life and only invest or buy goods that have good sustainable practices.  The concept of using the pounds in your pocket as a ballot or preference as to where you want to spend your money gradually shifts corporatebehaviour.   Attitudes in America towards climate change is beginning to shift and and academic evidence was provided to show this in America as well as Australia who very much depend on the supply of commodities for their economic wealth.  This has led to growth of sustainable investing in the US growing from 3.7 trillion in 2012 to 12 trillion in 2018, all of this movement has meant that companies either because of regulation or through market pressure have to gather and report their key corporate responsibility and sustainability and environmental performance which means the data is available for portfolio managers to evaluate, compare and contrast companies when deciding how they are to invest and what price they are prepared to pay for a particular equity.

It was clear that a similar investment philosophy to most GAIA firms long held view can be adopted and there are a wide range of local systematically invested portfolios on offer to fit most asset classes in portfolios that theGAIA membership would recognise as appropriate investments

Finally, Sam coached us as to how to speak to clients about sustainability and how to communicate our sustainable investment philosophy with clients in an effective aggressive way.

Academic research referred to in talk

Clark, Gordon L. and Feiner, Andreas and Viehs, Michael, From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance (March 5, 2015). Available at SSRN: https://ssrn.com/abstract=2508281

Gunnar Friedea, Timo Buschb* and Alexander Bassenb, ESG and financial performance: aggregated evidence from more than 2000 empirical studies, Journal of Sustainable Finance & Investment, 2015 Vol. 5, No. 4, 210–233, Available at: http://dx.doi.org/10.1080/20430795.2015.1118917

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