ESG a Game-Changer – But Plenty Still to be Done…

Environmental, Social and Governance (ESG) principles are a game-changer to the future of investment – that was the consensus at our round-table event in London, hosted in conjunction with Lansons and LuxFLAG. But before we start applauding the progress made in this critical area, our enthusiasm should be tempered by the view that there is much work ahead if the investment industry is to strike a balance between profits and sustainability.
This follow-up to my previous blog highlights some of the key discussion points from the event with insight into how the industry is responding to both the opportunities and challenges posed by investors and regulators around ESG. A number of themes emerged that particularly characterised the nature of the discussion, including: 
  • ESG as a driver for innovation within the industry
  • Greater transparency will encourage market growth
  • An expectation of regulation in this high-profile area

Responsible investing is everyone’s problem

In a lively debate at the event, panellists from a range of backgrounds, both within and outside of the asset management field, discussed ESG definitions, trends and challenges as well as answering probing questions from the audience. One of the trends according to panellist Sachin Vankalas, Director of Operations & Sustainability at LuxFLAG, is that an increasing awareness of ESG is driving demand in this investment category and that this is resulting in a degree of standardization in the investment decisions of asset managers along the lines of UN and EU Terminology. 

This was echoed by Archie Beeching, Director of Responsible Investment at Muzinich & Co, who identified that it is the responsibility of all investors, from individual pension-holders to institutions, to make tangible choices to invest responsibly. He asserted that regulation, labelling and reporting will all play a role in ensuring that returns can be achieved in combination with a positive investment impact.

ESG – a force for innovation?

Responding to a question about whether the industry is doing enough with ESG to effect lasting progress, Sustainable Investment Consultant Sital Cheema answered that the goal of long-term sustainability can be a stimulus for investment innovation – moreover, forward-thinkers in the industry that are able to get the balance right between the E, S and G of this growing theme could benefit from future leadership in this space.

Innovation was a subject also taken up by Roddy Temperley, SDL’s Chief HR Officer, who suggested that the skills shortage caused by the exceptional growth in ESG should encourage recruiters to look beyond the normal talent pools and investigate non-profit organizations, special interest groups and other networks for expertise – this in itself could be a driver for the advancement of thinking in this field.

Data is key to transparency

Discussion progressed to the question of how much ESG was becoming part of the mainstream in investing. Archie Beeching addressed the issue of data and, specifically, that for the ESG investment process to become systematic, high quality information on responsible investing is essential. The overarching need should be to ensure that investment factors are not viewed purely in financial terms and that the unseen costs of investing – in areas like the environment, workforce equality and sustainability – are also clearly visible along with the positive economic impacts of ESG products.

Sital Cheema endorsed the view that a growing level of reporting is required to create transparency for potential investors and break down the barriers to market growth; key to this is the need also for education among the investment community to ensure consistency in reporting. Growing pressure from shareholder activism is pushing companies to take a responsible view of their investment approaches but the more proactive will prosper from deeper engagement with all of their stakeholder communities.

Regulation is coming – and more will follow

Inevitably, the subject of regulation was given significant attention during the debate. It was generally accepted that governments were not doing enough – yet – to regulate this field but that there would be growing momentum to rectify this shortcoming. Sital Cheema voiced her observation that the vast majority of investors want to see long-term sustainability balanced with profitable returns from investment activity but that more regulation would be required to ensure that this becomes part of the fabric of investment behaviour.

That viewpoint was summed up eloquently by Sachin Vankalas when he stated that this area “should not be seen as growing the green economy but as greening the growing economy.”

What next?

As the demand for ESG investments continues to gather momentum, partners like SDL, Lansons and LuxFLAG will increasingly be needed to unravel the complexities faced by companies operating in this field. Acting together as thought leaders on the influence of ESG principles, you can expect to see more content from us all as well as further events to reflect the ongoing debate.

In the meantime, why not listen to the podcast from our event which gives a flavour of the debate and an opportunity to hear some of the discussion that took place.