Reasons for integrating ESG into investment portfolios

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ESG investments have been growing on popularity year on year and with this shift, portfolio managers are restructuring and incorporating ESG screening and investment approaches.

Market trends show that global consciousness around ESG investment consideration has increased and we can see intergenerational changes in terms of attitudes toward environmental preservation, social impact and governance.

There are a number of factors driving fund managers to restructure their portfolios to implement ESG investment strategies.

While firms with higher levels of AUM tend to have more ESG resources and more ESG integration, investment professionals at smaller companies are also leveraging from technology developments that are enabling them to analyse ESG factors more thoroughly and efficiently.  

According to a survey conducted by Russell Investments, fund managers have been motivated to integrate ESG as part of their investment process due to the following reasons.

33% integrate ESG into their investment process in response to client demand.

32% are motivated by a belief in superior risk-adjusted returns.

Source: Russell Investments 2018 ESG survey

Which ESG factors carry the most importance when undertaking investment decisions?

Fund managers cited the following to be key considerations:

  • 91% Governance
  • 35% Decrease security-specific risk. Neglecting to consider ESG impacts can have financial repercussions in terms of fines, reputation and litigation
  • 16% Positive security returns

On the flip side, 49% of firms do not allow ESG considerations to dominate investment decisions regardless of their potential to increase security-specific risk or generate positive security returns.

According to research conducted by Russell Investments progress in ESG data and scores is allowing companies and investment processes to be more robust on a global scale.

  • 56% of firms incorporate quantitative ESG data into their investment process
  • 80% use a combination of both internally-produced data and externally-produced data
  • 12% rely exclusively on externally-produced data

Global Opportunities and Challenges

The good news is that globally the responsible investment industry has been gaining momentum and growing considerably. Yet great opportunities remain as there is still great scope to gain market share.

Only 26% of all professionally managed assets globally amounting to $23 trillion in assets under management are managed under responsible investment strategies according to the Global Sustainable Investments Alliance.

Based on data trends reviewed by Responsible-Investors there are strong quantitative and qualitative reasons for integrating ESG into investment portolios:

  • Opportunity to take front and participate in achieving the UN Sustainable Development Goals
  • Reduce global warming and associated climate change risks
  • Return potential
  • Increase Assets Under Management in line with rising market demand for ESG strategies
  • Reduce security specific risks as neglecting ESG impacts can have repercussions in terms of fines, litigation costs and carry reputational damage
  • Engagement and conviction from employees and sales staff

Perspective by Carlos Mauleon Insight Contributor at Responsible-investors