Don’t lose your head
This report has, of course, been welcomed by those pushing the ESG agenda. It is easy for investors to dismiss all the noise about ESG should be considered because it helps make the world a better place, but if the financial returns and increasing valuations are there, it would be difficult to ignore. If MSCI’s conclusions prove correct then could ESG be on its way to being considered a mainstream strategy.
The man behind the report, however, makes it clear that he is not saying that backing companies with high ESG ratings guarantees higher profits.
“No, you can never guarantee that,” Giese says. “No investment approach guarantees outperformance.”
He explains that traditional factors outperform on average for long periods of time as does the ESG signal on average in MSCI’s benchmark universe. He does, however, fire a warning to investors and trustees: “It doesn’t mean it outperforms every year and it doesn’t mean it outperforms for every single stock, of course.
“The key message that we have seen is that ESG is a tool to achieve better risk-adjusted returns,” Giese adds. “That is the key message and this is why we are seeing the in-flow of assets into ESG.”
Indeed, in the US alone, $8.7trn of funds managed by professionals considered sustainable, responsible or impact investing factors when being put to work back in 2016, according to the US Forum for Sustainable and Responsible Investment. This was up from $6.5trn in 2014.
With so much already invested in companies with high ESG ratings, could this research be the catalyst that moves ESG into the mainstream from being just a niche for religiously-minded or ethically-focused investors.
While it is unlikely that on the basis of one report pension schemes, insurers and other institutions will start moving all of their portfolios over to an ESG mandate, this could be the start of a long journey to the mainstream for the investment class.
One investor, however, believes that MSCI’s findings will not be a game changer for ESG investing; this will come from regulation. “Research tends to evolve over time and change behaviours gradually,” says Tim Manuel, Aon’s UK head of responsible investment.
“What we haven’t seen is that one piece of ESG research that really changes perceptions,” he adds. “It is more about an acumination of that research over time that gradually brings people round to the idea that this is something that is a material concern and can make a difference to their portfolios.
“It will help contribute to the debate, but it will take a lot more than one piece of research to shift perceptions,” Manuel says. Integrated ESG is core to Newton’s approach and a lot of people are already following that, Bell says. “Sustainable strategies will become much more common, but it will not happen overnight.
“There are still a number of asset owners who don’t want to restrict their investment universe, and they believe that the best chance of success comes from having the widest possible opportunity set,” Bell adds. “We would argue that there are strong arguments to suggest that investing along ESG lines can help the environment, help the world but also help your returns.”
For some the arrival of ESG as a major market feels a lot closer. Jeannette Andrews, corporate governance manager at Legal & General Investment Management (LGIM), believes that ESG is becoming mainstream.
“It is something that we have been looking at for many years,” she says. “We are committed to it under the stewardship code, under our obligations under PRI. It is something that our clients ask us about. They expect us to be doing it.
“We are getting the data points now, we are seeing the research coming through demonstrating the materiality of it, so we are well on the road to it becoming a mainstream discussion,” she adds.
