More investors are embracing environmental, social and governance (ESG) principles, prompting active managers to enhance their credibility on that front.
Actively managed funds are experiencing a renaissance of sorts and with the industry looking for new frontiers that are conducive to this management, environmental, social and governance (ESG) investing stands out as a viable option.
Analysts have also questioned whether an ESG focus leads to improved financial outcomes. The U.S. Department of Labor has taken this stance and recently proposed a rule to check retirement plan providers that financial gains can’t be legally sacrificed for social or political benefit.
“Not having a sound ESG policy is not yet a deal breaker for most allocators, but it is clearly becoming more important to getting business and winning mandates,” according to new research from Cerulli Associates.
As sustainable investing gains traction, there is growing debate between the need for investments to do good or providing better risk management and performance.
ESG Outlays Swelling
ESG investments have resonated with investors whom try to contribute to a better environment, society or workplace. According to Deloitte data, the percentage of global investors that have applied ESG criteria to at least a quarter of their investments has increased to 75% in 2019 from 48% in 2017, as reported by CNBC.
The numbers are expected to continue to rise as ESG is just beginning to make headway in the U.S. markets. Deloitte projected that U.S. professional investors could allocate 50% of their investments into ESG assets over the next five years.
“Allocators are evaluating asset managers’ ability to judge the risk and opportunity associated with material ESG considerations and apply them to sound investment decision-making,” notes Cerulli Director Michele Giuditta.
Regulators and lawmakers are beginning to step up. The European Union will set up performance thresholds from 2021 onward and minimum safeguards meant to help investors and companies transition into a greener economy. Portfolio managers of ESG funds in Europe will be required to explain how and to what extent companies are following sustainable steps.
Active manages extolling ESG virtues need to show “how the firm incorporates ESG criteria and providing transparency into active ownership activities — proxy voting, engagement, and shareholder resolution activities — to show alignment with the firm’s stated beliefs and views,” according to Cerulli’s Giuditta.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
