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Portfolio > Portfolio Construction > ESG

ESG Considerations Taking Root Faster Than Expected

By Mark Gilbert

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Including environmental, social and governance considerations in investment decisions is becoming of paramount importance for the fund management industry. Moreover, those principles may be coming into force in asset allocation even faster than previously thought.

A new survey of ESG adoption rates, from UBS Group AG’s asset management unit and Responsible Investor Research, covers more than 600 asset owners in 46 countries, responsible for more than 19 trillion euros ($21 trillion) of assets.

The report splits the universe of respondents into three categories. “Doers” are investors already taking ESG into consideration in their day-to-day allocation strategies. “Adopters” are those planning to do so in future, while “Non-Doers” are firms which don’t see ESG as material to their investment strategies. And the “Doers” dominate.

The survey is significant because almost two-thirds of the respondents aren’t signatories to the United Nations Principles for Responsible Investment charter. That in turn suggests underlying ESG adoption is even more widespread across the investment industry than it would appear.

The survey “tested the hypothesis that ESG considerations were taking root more widely among asset owners than was commonly recognized,” the report says. “The short answer is that they are.”

Of the firms in the survey that haven’t joined the UN charter, some 68% are already applying ESG standards, with a further 25% saying they plan to do so. The study cites an unidentified U.K. company pension fund as saying the charter just adds to the reporting burden.

That makes sense; a London-based portfolio manager told me that he’s reluctant to sign up to the PRI out of concern that future iterations of the guidelines might prove unpalatable and overly restrictive, but once a firm has joined it would be commercially difficult to abandon the club.

The higher proportion of U.S. investors saying they don’t plan to adopt ESG principles — 11%, compared with 3% in the rest of the world — may be because of concern about breaching their fiduciary duty to their clients, based on the findings of a recent paper by two U.S. law professors.

Legally, trustees “must consider only the interests of the beneficiary,” Max Schanzenbach of Northwestern University and Robert Sitkoff of Harvard Law School wrote. That would bar a fund manager motivated purely by ethical considerations from allowing ESG concerns to steer investment decisions.

If, however, the trustee is convinced that pursuing such an investment philosophy will generate higher returns, the legal requirement would be satisfied. But the professors warn that the evidence for that is far from conclusive. Studies “have exaggerated the potential for ESG factors to generate excess risk-adjusted returns, and have failed to appreciate the instability and lack of robustness in academic findings,” they wrote.

The UBS study showed that about a third of the respondents guided by ESG had seen a positive effect on returns, with only 1% seeing financial performance impaired.

But more than half of the respondents in each geographical area covered by the survey were motivated by ESG’s anticipated positive effect on returns, which can be seen as the carrot, however elusive it is for now.

The corresponding stick, however, is a much more important incentive: Some 82% of European firms, 72% of U.S. respondents and 88% in Asia agreed that the “materiality of risks with not considering ESG factors” was their primary consideration.

The climate crisis isn’t going away. And even though the jury is still out on how to measure and classify socially responsible investing, the asset management industry’s rapid adoption of ESG principles shows capital can be harnessed to do good in the world.

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Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”  

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