ESG as a lens for value creation

Vanguard Group’s announcement last week that they are now urging companies to disclose how climate change could affect their business & asset valuations is the latest in a rising tide of strategic realignments by asset owners & managers that shows the increasing importance of Environmental, Social & Governance (ESG) criteria to investment decision making in 2017. There are now > 1400 signatories to the UN Principles for Responsible Investment (PRI) committed to incorporating ESG issues into their investment activities with total assets under management of approximately $60 trillion. Over 100 ratings agencies now provide ESG data with Bloomberg playing a leading role in its proliferation having added ESG metrics to their terminals as far back as 2010. Underpinning this pivot to sustainable and responsible investing is a mounting body of research that shows the strong correlation between sound ESG metrics and financial performance. It is clear that the incorporation of ESG data into investment portfolio management is rapidly becoming mainstream.

Seeing the huge opportunity ESG investing represents, major financial institutions have responded by rapidly building up human capital in this space: scaling teams and acquiring leading edge boutique investment firms. Blue Chip asset managers have hired premiere talent, aiming to serve growing demand from institutional investors, foundations aligning portfolio investments to programmatic values and UHNW and sovereign wealth funds. For example Goldman Sachs, took a “buy vs build” approach and acquired Imprint Capital in late 2015; Deborah Winshel moved to Blackrock from The Robin Hood Foundation in the same year and reports directly to the CEO Larry Fink; and Andy Sieg, promoted to head of BOA Merrill Lynch Wealth Management in January 2017, has “made impact investing a strategic priority.”

The motivations for sustainable and responsible investing have now moved far beyond investors simply seeking to avoid activities to which they object and ESG-investing is now broadly seen as an opportunity to incentivise companies to reduce their environmental impact and ultimately deliver investment outperformance. In short asset managers hear investor demand, but they also clearly see ESG investing as profitable for themselves and their clients and are quickly building ESG-focused teams to fully harness the opportunity.