Another institution already seeing ESG on its way to becoming a major investment class is Candriam Investors Group. “People are looking in that direction more and more because it is making more sense to do things this way,” global head of consultant relations Fawzy Salarbux says.
For those not convinced that ESG investing is heading for the mainstream regulation could be the catalyst that makes asset owners improve the ESG standards of their portfolio. Manuel says that real change can be driven by regulators when they get more serious about this and “really start to do something substantial rather than just talking about it”.
Regulation aside, the people running the country have stepped in with the intention to improve standards, if needed. The Environmental Audit Committee has surveyed the top 25 pension funds to ask how they are managing climate change risk.
“It has shone a spotlight on the issue and it has really made those at pension funds take it seriously because their responses will be made public,” Manuel says.
The Department for Work and Pensions (DWP) is planning to launch a consultation to roll that out to all pension schemes in the country.
“That is the right end of the investment chain to start,” Manuel says. “If the asset owners take it seriously then their intermediaries will take it seriously, which then flows down to the companies themselves.”
Different reports; similar conclusions
MSCI’s paper is not the first to claim to have found a positive connection between ESG standards and corporate performance.
Calvert-Serafeim, in The Role of the Corporation in Society: Implications for Investors, found that a higher ESG performance correlates with better management or business model quality. It also concluded that the valuations of firms with a better ESG performance reflect higher expected growth and a lower cost of capital.
Calvert-Serafeim’s research, the first such collaboration between the two, also found that firms with higher ESG qualities trade at higher valuation multiples in equity markets, while firms with better ESG performance also had the added benefit of lower credit default swap spreads.
The academic world has also contributed to the debate. A study by anthropologist Alex Edmonds, who is professor of finance at London Business School, found a positive link between how happy a company’s employees are and stock price movements.
There is also a paper from Elroy Dimson called Active Ownership, which shows that successful ESG engagement has a materially positive impact on companies.
Academic studies on the subject include the University of Hamburg, which studied 2,000 previous research papers in 2015. It found that looking at E, S and G individually identifies a stronger correlation than if they are aggregated together.
It makes sense because investors run the risk of averaging out when you aggregate something together. Research from Harvard concluded that ESG factors lead to a lower cost of capital and better operational performance.
“They all look at the same issue but come back with slightly different conclusions,” Andrews says.
