Sylvia Solomon ASIP, Chair, CFA UK ESG Panel and member of CFA UK Examinations and Education Committee. Head of Investment, Private Markets, EEA Fund Management Ltd. shares how she thinks corporates can prepare themselves for the future of the industry through an ESG lens.
Two decades have passed since the late Kofi Annan’s stirring and memorable speech [1] first planted the seeds for the modern corporate sustainability movement. What began as visionary initiatives in 1999 – the launch of the UN Principles of Responsible Investment and the UN Global Compact of shared values and principles – have resulted in irrevocable advances in implementation metrics.
Looking beyond the horizon
It is generally accepted that the manner in which we invest today inexorably shapes tomorrow’s world. The call for companies to align strategies and operations with universal principles on human rights, labour, environment and anti-corruption resonates in the corporate psyche. Incorporating environmental, social, and governance factors (commonly known as ESG) includes taking actions that advance societal goals.
The asset management industry has recognised that investment opportunities should take into account the context of material impacts on a changing world. More than 25% assets under management globally are now invested according to the premise that ESG factors materially affect a corporate’s performance and market value – this figure is growing. Institutional investors that practice sustainable investing include some of the world’s largest funds, such as the Government Pension Investment Fund (GPIF) of Japan, the Dutch pension fund ABP and Norway’s Government Pension Fund Global (GPFG), the largest sovereign wealth fund.
Sovereign investors have a powerful effect on both local and worldwide economies. By nature, they act as long-term investors with the focus of leaving a legacy for future generations. Mission statements of these large asset owners are increasingly calibrated towards being responsible investors. To achieve their goals they want to know how asset managers consider and act upon ESG impacts on their operations and strategy.
Reshaping vision on integration
The concept of ESG integration as a determinate of long-term investment performance is not about forcing a particular set of values on investing. Rather it encourages a more sophisticated understanding of how these issues affect risk-adjusted returns. Core elements to consider for examination include the following “3Is”:
Identification – Has the corporate identified material ESG issues relevant to its business?
Implementation – Has the corporate done the work to assess these thoroughly and, where necessary, incorporated the implications into their long-term strategy?
Information – Has the corporate adequately communicated its approach to sustainability issues and its influence on strategy?
Effective integration of ESG-based decisions into corporate strategy fundamentally changes the way businesses assess what makes them successful. In fulfilment of their fiduciary duty, can asset managers really afford to integrate ESG on an optional basis? Equipping your talent pool with trifocal ESG lenses will embed a refined analytical ethos.
Transitioning from cultural viewpoint to action
Encouraging and enabling next generation thinking within your talent pool will help develop a hub of ESG investors, accelerate assimilation of ESG-based values and advance understanding of the expanding amount of ESG data generated. This is important to assist in navigating the complexities of investment decision-making in an investment environment where extraneous variables have material impact.
Conclusion
Acclimatising to a sustainable investment environment will pose challenges for firms that do not future proof their talent pool. Incorporating the trifocal ESG lens will help identify necessary changes to existing processes, technology and culture. Successful corporates of the future will have prioritised understanding of millennial values and ensured their investment professionals are fully trained and equipped with the tools required to have meaningful discussions around ESG investing.
There is an opportunity to redefine ESG learning standards to retain relevance and gain a competitive advantage in this evolving industry. It is also imperative that asset managers harness and develop their ESG intellectual capital within a common framework.
References
[1] Secretary General of the United Nations, World Economic Forum, Davos, January 1999.
Registrations for the CFA UK Certificate in ESG Investing are now open. Find out more about the certificate and how it will benefit your career, or register for the exam here.
This article was written by Sylvia Solomon ASIP, Chair, CFA UK ESG Panel and member of CFA UK Examinations and Education Committee. Head of Investment, Private Markets, EEA Fund Management Ltd. If you too would like to join the conversation and share your views on the development of ESG investing and its impact on our industry, please contact marketing@cfauk.org to enquire about editorial opportunities.
