In December 2019, investment professionals from 60 firms participated in the first formal qualification on ESG in the UK, the new Certificate in ESG Investing. Over the past few months, we have been showcasing the various insights investment professionals have on ESG in the industry and roundup why the conversation is continuing …
Environmental, social and governance (ESG) issues have an impact on all parts of our society. Climate change, pollution, human rights, unsafe working conditions, bribery, corruption and board diversity are just some of the matters, companies need to consider too manage business risk and make returns sustainable.
Ever since the late Kofi Annan launched the UN Principles of Responsible Investment and the UN Global Compact of shared values and principles in 1999, the industry has slowly started to integrate ESG factors into the investment process.
Today responsible investment is mainstream. Businesses have been placing an increased emphasis on sustainability programmes, while governments have launched policies to take ESG issues into account.
ESG investing has grown tremendously
It is expected, integrating ESG factors into the investment process will continue to grow at a fast pace. On the ESG Voices podcast Graeme Griffiths, COO of the Principles for Responsible Investment (PRI), saw the most substantial change in the next decade to be in decarbonisation.
“We will see a significant shift for example in energy production from fossil fuels to renewables possibly wind and solar,” said Griffiths. “That will create some significant new investment opportunities.”
One area that has been growing strongly is green bonds. In 2015, green bond issuance was just USD45bn, but after the Paris Agreement, which sets to limit global warming to 2C, was signed late that year, issuance doubled the next. In late June this year, the market passed the USD100bn mark: the first time this has happened in the half of the year.
Monica Filkova, Head of Market Intelligence at the Green Bonds Initiative said: “Green bonds are a bridge to achieving Nations Sustainable Development Goals (SDGs), which are being adopted by companies, investors and governments to measure progress across environment and social improvement needs.”
Understanding risk through ESG
By the industry integrating ESG factors into the investment process professionals can get a good understanding of where the risks lie within a company.
“They can act as something of a ‘canary in the coalmine’, providing evidence of trouble down the line,” pointed out Lisa Beauvilain, Managing Director and Head of Sustainability & ESG at Impax Asset Management.
“For instance, the way in which ESG analysis highlighted governance concerns for a number of technology firms some time ago that are now facing greater public and regulatory scrutiny that has impacted their financial performance.”
Asking ESG related questions to multiple members of an investment team can potentially uncover greenwashing, said Honor Fell, CFA, Vice President of Responsible Investment at Redington and member of the ESG Working Group at the CFA Society UK.
Fraser Lundie, CFA, Head of Credit at Hermes Investment, also pointed out that the more ESG is integrated right across a business, the risk of a company greenwashing will be cut right out.
In the future, Lundie expects ESG integration will involve people in products, sales, business development and consultants, not just fund managers and analysts.
Government policy is making sure everyone’s level of awareness on ESG investing is raised. Vibeka Mair, Senior Reporter at Responsible Investor, in the ESG Voices podcast, argued the EU Commission action plan on sustainable finance will force financial advisers to talk about ESG to their clients.
Mair who also won the ESG Journalist of the Year award at the CFA UK Journalism Awards 2019, thought this could really transform the industry.
Future proofing the industry with ESG skills
The investment industry has already begun making sure the next generation is equipped with ESG investing skills. Sylvia Solomon, ASIP, Head of Investment, Private Markets at EEA Fund Management, explained the importance of developing a new hub of ESG investors.
Solomon who is also Chair of the CFA UK ESG Panel and Member of CFA UK Examinations and Education Committee, talked how “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.”
However, a lot of these issues are already important to millennial workers. Ben Burling, Managing Director at Logan Sinclair, pointed out: “Candidates in their mid-twenties to early thirties increasingly want not only a decent salary but a sense of purpose in their daily life. Environmental issues such as climate change and pollution, social issues such as working conditions and diversity, and governance issues such as executive pay and political donations all appear uppermost in their minds.”
What next for ESG investing?
But there are still challenges when it comes to ESG investing. Brishni Mukhopadhyay, CFA, Asset Management at J.P. Morgan Asset Management, said there is a lack of uniformity in the regional approaches to ESG and lack of standardisation in industry interpretation of the relative importance of key ESG attributes.
Mukhopadhyay outlined the importance of standardisation to keep the industry accountable in its ESG action planning and strategies.
The need for investment professionals to be qualified in ESG investing does not look like it is going to go away anytime soon.
In the UK, more than 500 candidates signed up for the Certificate in ESG Investing. Elena Koycheva, CFA, Senior RFP Writer, Global Business Development at BlueBay Asset Management who sat the pilot exam said she did so to expand her knowledge and to keep up with client’s demand.
In the ESG Voices podcast, Koycheva said “in order to be able to prepare good presentations” for her clients she needs to know how the ESG investment landscape is developing and how she can continue to stay relevant to her clients.
The conversation in ESG investing is only going to keep on growing.
Get in touch if you want to share your views on ESG and help us continue the debate