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Portfolio > Portfolio Construction > ESG

U.S., int’l equities show greatest ESG growth potential

By Warren S. Hersch

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Most asset managers believe that investors’ heightened focus on environmental, social and governance (ESG) strategies is a long-term “secular” trend, according to a new report.

Cerulli Associates discloses this finding in its August 2014 edition of “The Cerulli Edge: U.S. Monthly Product Trends.” The issue explores portfolio solutions and benchmark-neutral product developments, examining how assets managers are responding to retail channel needs.

The research indicates that nearly 9 in 10 (87 percent) of asset managers see investors’ increased attention to ESG strategies as a secular trend. Yet most of the asset managers surveyed also say their ability to offer ESG capabilities is only “somewhat important.”

Asset managers surveyed by Cerulli have observed a moderate (65 percent) or significant (13 percent) increase in demand among clients and prospects for the United Nations-supported Principles for Responsible Investment (PRI) Initiative: an international network of investors who seek to implement six principles for responsible investing. In implementing the principles, PRI signatories aim to contribute to the development of a sustainable global financial system.

The Cerulli report notes that some asset managers use ESG and their signatory status to distinguish their approach to managing risk and generating investment returns. Many asset managers also flag U.S. equity (78 percent of respondents) and international equity (74 percent) as asset classes with the greatest growth potential in the ESG space.

“Several factors shape [asset managers’] view of asset class potential,” the report states. “U.S. equity and international equity are among the most commoditized assets classes — ESG can be a valuable differentiating factor.

“Private equity and other alternative investments such as real estate operate with greater flexibility and are bound by fewer liquidity constraints than highly regulated vehicles, which allows them to invest directly in unlisted companies to facilitate impact investing or other ESG factors such as shareholder advocacy,” the report adds.

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