Michele Leung, Green Finance Advisor of Friends of the Earth (HK)
According to Global Sustainable Investment Review, USD $32 trillion of assets are professionally managed under sustainable responsible investment strategies in 2018. It represented a compounding annual growth rate of 43% over the past 12 years. As more institutional investors are integrating ESG into their portfolios, studies have been done on the leading factors for such trend.
Undeniably regulation is one of the main drivers. For example, EU has introduced the “EU Climate Transition Benchmark” and “EU Paris-Aligned Benchmark”, which aimed at reallocating capital towards a low-carbon and climate resilient economy. Domestically, we are also seeing stricter disclosure requirement enforced by various exchanges. Fiduciary duty is a primary driver for asset owners, particularly for the pension funds and endowments that have to respond to their stakeholders. Risk management is also an important aspect as ESG is considered to have some downside protection nature, from mitigating ESG risk to avoiding reputation risk.
Surprisingly, generating outperformance doesn’t yet to be considered as a key factor for ESG adoption. Despite the ongoing skeptics, more researches have been done to establish the financial relevancy. For example, in one industry study (link), it looked at the correlation between ESG and market performance, which found ESG integration generally demonstrated historically higher active return profiles in Emerging Market and Asian equities.
ESG funds are also gaining traction under current situation. As of Jun 1, 2020, iShares ESG MSCI USA Leaders (SUSL) outperformed S&P 500 year-to-date by 176 bps, the underlying benchmark was based on best-in-class approach which targets the companies that have the highest ESG rated performance in each sector of the parent index. In the meanwhile, COVID-19 has underscored the importance of ESG issues to company resilience and long-term performance. Social and Governance issues are at the forefront with spotlights on labor practices, employee health and safety and supply chain management.
Overall, it is encouraging to see ESG integration is on the rise with more investors bringing ESG into their investment decisions and achieve sustainable value creation.