How to gain a USP with the integration of ESG criteria

Detlef Glow, head of EMEA Research at Lipper looks at the growing importance of ESG criteria to the investment process.

It seems that socially responsible investing (SRI) or its modern version—integration of environmental, social, and governance (ESG) criteria in the investment process—has made its way out of the niche market into the mass market. The fund industry is reporting above-average growth numbers for this kind of product. In addition, SRI has made its way into the media. But has SRI really made it into the mass market?

Looking at the French market, this can clearly be answered with a no. A recent survey by the French polling institute Ipsos for Eiris and the French social investment Forum pour l’Investissement Responsible showed that 67% of the polled individuals have never heard of SRI, while another 25% of the participants have heard about SRI, but do not know what it involves.

For me these results are quite shocking. I would have expected more people would know what the term means. From my point of view, the industry needs to build resources for client education to make investors aware of SRI- and ESG- based investment approaches, which would be key for the future growth of this part of the fund industry.

Or the industry could neglect the need for client education and simply integrate SRI/ESG factors into mainstream portfolio management approaches by using such data in the selection process or employing so-called overlay strategies (excluding industry sectors such as gambling, tobacco, weapons, liquor, etc. from the investable universe or by stopping any kind of trading in derivatives on food, such as wheat or corn futures). Another approach that has become popular with professional investors is to use engagement strategies or the “active investor approach.”

The fund manager evaluates the companies he owns in his portfolio from an ESG point of view and discusses any controversial issues directly with the board to strengthen the ESG profile of the company. If the fund manager thinks an issue might become a critical topic for the economic performance of the company, he can try to influence the decision making on these controversial projects during the annual shareholder meeting. In the world of modern portfolio management the integration of these factors into the mainstream portfolio management process could be used as a unique selling proposition (USP) without calling it an SRI approach; all asset managers are looking for differentiators that will give them a unique profile.

By the way, integrating ESG criteria can lead to the exclusion of companies that might become part of a scandal and can protect investors of funds from losses. As shown by BNP Investment Partners and Cedrus AM before, during, and after the Volkswagen (VW) scandal, this can lead to additional media attention and positive headlines.

I would assume SRI/ESG will become a mainstream practice in one way or another, since more and more professional/institutional investors are starting to integrate nonfinancial criteria in their investment approach. Or they are demanding this integration by their asset managers, which will eventually change the way conventional mutual funds are managed.

The views expressed are the views of the author, not necessarily those of Thomson Reuters.

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