If there were any doubts that environmental, social, and governance (ESG) criteria would be in everyone's minds at this point in time, reality has showed us the opposite. I remember the bygone years of late 2000 when green bond funds seemed completely out of the box. Clients didn't show any particular interest on them.
At Novo Banco, we were one of the first companies to launch a social responsible mutual fund managed by our asset management company in 2003. Sadly, it never had the success we thought it deserved.
Investors' perceptions of this investment theme has evolved a lot since then thanks to the millennial generation, women's empowerment and growing awareness from global institutions, with the United Nations as the main contributor.
While the benefits associated to this type of investment are intuitive, it is no less certain that, given the relatively embryonic state of quantification of its specific benefits, it can easily be target of skepticism from both professional and retail investors. And it is here where the effort from asset managers in raising investors' awareness is crucial.
Companies will be also playing a key role in defining the criteria of ESG investments, evaluating their achievement by market players, and setting up specific benchmarks, which will capture the specific benefits of responsible investment, while opening it to the vast universe of passive investment and its large volumes of assets under management.
The main benefits and opportunities that we identify with the incorporation of ESG factors in the products and services offered to clients is the additional qualitative criterion, which has the potential to identify companies with a certain type of unique characteristics, allowing them to increase their competitiveness. In this sense, its correct identification will be another determining factor for an active, bottom up investment style, based on a high degree of conviction regarding the selected individual titles that will increasingly be a factor criteria in fund selectors' model.
In our view the main challenge is to avoid becoming a trendy factor, passing on as sustainable investment, practices, investment strategies and design and distribution of investment vehicles labeled ESG, which, in fact, do not deserve that label.
The best way to "unmask" this trend should be the task of independent companies that define as objectively as possible what constitutes an ESG investment and to establish representative indices of this type of investment.
In Portugal, even though the last studies point towards huge interest from clients for this type of investment products (see Allianz's study), that is not what we see in our day to day business. Here, as in any other type of activity based on free competition between the various market players and the free choice of the final consumer, the type of incentive, which in the long run will promote ESG investment in a more sustainable way, will be one driven by market forces.
Government should play a complementary role and should have as its main (single?) component the definition of fiscal incentives. Certainly, there are sectors where disrespect for ESG factors will tend to have more visible and more pernicious effects on society at large. However, in order to avoid as much distortions as possible in the economy, governmental incentives should be transversal to all sectors of activity. Given the wide scope of this issue at the level of potential impacts on society as a whole, as well as the international nature of it, CMVM initiatives should be guided by a full and rapid implementation in Portugal of the European Union's policies on this matter. Let's see what the near future has to tell us.