Switch on to sustainable investing, or else

Asset managers need to realise that sustainable practices are going to be a prerequisite for being hired to manage investment mandates in future, according to an article in Willis Towers Watson’s annual Global Investment Matters. publication. It says that asset owners will increasingly want to understand the broader risks asset managers are running, both at a portfolio level and at an overall strategy level. 

Jane Welsh, senior investment consultant at Willis Towers Watson, said: “We know for sure that many of the ultimate beneficiaries – pension fund members – as well as charities and endowments – are very switched on to sustainability and have strong feelings on the subject.”

In the article, the company concedes that the concepts are not clear-cut and that this has been an obstacle both to investor adoption and to asset managers’ ability to construct and articulate ESG strategies. It suggests that any approach starts with consideration of the financial impacts of ESG risks and opportunities and at a minimum means ensuring that asset managers consider ESG risks in selecting investments and building portfolios. It can also mean skewing the portfolio towards companies that rate highly on ESG criteria in the belief that these factors are not fully reflected in current prices. In addition, it can involve targeted thematic investments, for example, investing in sustainable real estate on the basis that markets are not fully recognising the opportunity presented by the shift to a low carbon economy, according to the company. 

Jane Welsh said: “Whatever approach is taken, it needs to be underpinned by effective stewardship of the assets. Through effective voting policies and engagement, asset managers can influence companies to raise their game and manage their businesses more sustainably.”

In the article, Willis Towers Watson also explores the most controversial aspect for investors: whether to accept that a focus on long-termism and sustainability entails preparedness to forego current gains for better future outcomes. 

Jane Welsh said: “The issue of whether sustainability means sacrificing returns at all is divisive. Although early studies indicated that the inclusion of ESG factors created slight underperformance, a growing body of evidence suggests their incorporation can help the portfolio match or enhance returns from non-ESG portfolios, but it is not clear cut and often suggests that ‘G’ or governance is the key factor explaining superior results. Other studies have suggested that company engagement can lead to superior risk-adjusted returns which again suggests that good governance is a key factor.”

According to Willis Towers Watson, asset owners will look to collaborate with other entities to ensure that they use their collective voice to effect positive change. 

Jane Welsh said: “The whole of the investment industry needs to rise to this challenge. Increasingly, clients are demanding it – they are under pressure from their members, their sponsors, from regulators and from industry bodies, as well as from the increasing body of evidence showing that ESG risks are rising and need to be understood and managed better.” 

Global Investment Matters covers topical investment issues and this year includes articles on:

• Debunking the outsourced CIO myths – The six most common misconceptions and why they should be challenged
• Building bridges - Governments are under pressure to produce more compelling investment cases for their infrastructure projects
• Thematic investing in an era of uncertainty – the challenge of investing in an ever-changing world