Advisors who fail to understand the growing popularity of investing according to environmental, social and governance (ESG) principles risk falling behind their competition. According to two recent studies — one by the CFA Institute and the other from Cerulli Associates — ESG factors are becoming increasingly important for investment professionals and their clients.
Seventy-four percent of investment managers take ESG factors into account when making investment decisions, and risk management is the single most important reason why, Cerulli said in its November Cerulli Edge report.
The CFA Institute’s recently published ESG Guide for Investment Professionals showed similar results: 73% of survey respondents consider ESG issues when making investment decisions and 63% did so to help manage investment risks. (Forty-four percent consider ESG issues because their clients demand it). Also, Bloomberg has reported that the number of customers using ESG data in 2014 grew 76% from the prior year and swelled by more than 600% since 2009.
“All financial professionals, whether they’re financial advisors, hedge fund managers or institutional investors, are doing themselves and their clients a better service by understanding these issues,” Matt Orsagh, director of capital markets policy at the CFA Institute, told ThinkAdvisor.
The corollary is also true: Those who don’t consider ESG factors are doing themselves and their clients a disservice. They’re more likely to miss something in their analysis, Orsagh said.
Contrary to popular belief, ESG issues are relevant not only for equity investments but also for fixed income assets because they can affect creditworthiness, according to the CFA Institute.
The London-based mining company Lonmin (LMI.LN), for example, issued a warning in 2012 about servicing its debt following labor conflict in Marikana, South Africa. “Risks pertaining to social issues, which could easily be overlooked in a traditional financial analysis, could also prove costly for fixed-income investors,” according to the CFA Institute report.
ESG factors are also the inspiration for green bonds, which invest in environmental projects, and social impact bonds, whose proceeds pay for projects or services that improve social outcomes.