Investor revolution

The leaders of most companies are aware that business plays a key role in solving pressing problems like climate change. Nevertheless, many of them are convinced that the pursuit of sustainability is not in the interests of shareholders. Of course, the heads of large investment firms often talk about their concern for environmental protection – however, in practice, neither investors, nor portfolio managers, nor analyst brokers almost never discuss environmental issues, social responsibility and governance (ESG) with corporate leaders. Business leaders themselves believe that these issues are still not on the main agenda of the investment community.

They are wrong. We recently interviewed 70 top managers from 43 global institutional investment firms, including the three largest asset managers (Blackrock, Vanguard, State Street) and organizations that own gigantic assets, for example, from the California Civil Servants Pension Fund (Calipers), California Teachers Pension Fund (Casts) and state pension funds in Japan, Sweden and the Netherlands. We do not know of any other study in which so many top managers from so many large investment companies would be involved. It turned out that for almost all of these people, ESG factors are extremely important.

Investors, of course, have been preoccupied with issues of social responsibility for more than a dozen years, but until recently this has not been translated into serious action. Most of the top managers interviewed by us told what measures their companies are taking to add sustainable development to the list of criteria when choosing projects for investments. We have no doubt that shareholders will soon begin (or have already begun) to demand corporate governance reports on ESG factors.

“ESG issues are becoming increasingly important for us as long-term investors,” said Cyrus Taraporevala, President and CEO of State Street Global Advisors, as a general consensus. – We are trying to analyze how significant factors such as climate risks, leadership quality and cyber security affect the company’s financial performance. Our investment approach is becoming more complex. ”

Statistics confirm that capital markets are undergoing profound transformations. In 2006, when the UN-supported Principles of Responsible Investment was introduced, 63 investment companies (asset owners, asset managers and service providers), managing $ 6.5 trillion of capital, signed a commitment to consider ESG issues when making investment decisions. By April 2018, 1,715 organizations had already made the same commitment, with a total value of managed assets of $ 81.7 trillion. According to the 2018 FTSE Russell global study, more than half of the world’s asset owners have already included or are incorporating ESG into their investment strategy.

Nevertheless, the leaders of many companies are still not aware of these changes. A recent survey conducted by Bank of America Merrill Lynch showed that top managers do not understand what proportion of their company’s shares belongs to firms that take into account sustainable development issues when choosing projects for investment. Managers think that this share is approximately 5%, while in reality it is close to 25%.

To prepare for a new reality, leaders should first of all understand what forces are acting in it. Having figured out why investors are not indifferent to ESG issues, leaders will be able to adjust the work of their organization and ensure the maximum growth of its shareholder value in the long term.

What causes change?

For five years, investor interest in ESG has been growing steadily. Six factors support it at once.

SCALE OF INVESTMENT FIRMS. The investment industry is very concentrated. The top 5 companies account for 22.7%, the top 10 – 34% of assets in trust. Leading investment firms today are so large that modern portfolio theory (assuming that assets with different risk levels should be combined to reduce volatility and maximize profitability) can no longer reduce risks at the system level. A small investment firm is able to protect itself from climate change and other systemic risks by investing in stocks of companies that build, say, shelters in case of cataclysms, or in “Doomsday assets,” such as gold. And firms that manage capital in excess of a trillion dollars cannot protect themselves from the influence of the global economy: scale obliges them to take care of the planet. Moreover, owners of large assets, including pension funds, forced to think for a long time: they need to plan the payment of pensions for 100 years. Hero Mizuno, director of investment at the Japan State Pension Investment Fund worth $ 1.6 trillion, notes: “We are a classic universal owner of assets with intergenerational obligations and, accordingly, with a long-range planning horizon.”

FINANCIAL FEEDBACK. Many executives still confuse sustainable investment with its predecessor, socially responsible investment, and they believe that adhering to the principles of sustainability, you need to sacrifice part of the profit in order to improve the world. This opinion is out of date. A study by George Seraphim and his colleagues at Harvard Business School (including one of the authors of this article, Robert Ecclesia) showed: companies that back in the early 1990s developed procedures to take into account ESG factors in business management, evaluate work by these indicators and convey the results to interested parties, over the course of 18 years overtaken in many ways by carefully selected organizations from the control group. Another study by Seraphim and colleagues found a positive correlation between high ESG rates and the firm’s excellent financial position. Investor data confirms this. In particular, a 2017 study by Nordau Equity Research (the largest Scandinavian financial group) shows that between 2012 and 2015, the performance of companies with the best ESG ratings exceeded the performance of companies with the worst rating by 40%! In 2018, Bank of America Merrill Lynch found that firms with impressive ESGs in the long term of three years earn higher profits than colleagues and are less likely to go bankrupt. In addition, their shares are more likely to show high investment quality and less likely to fall sharply in price. In 2018, Maundy Asset Management was able to find out Elgin European portfolios, management quality is particularly important, and in North American environmental factors. In particular, a 2017 study by Nordau Equity Research (the largest Scandinavian financial group) shows that between 2012 and 2015, the performance of companies with the best ESG ratings exceeded the performance of companies with the worst rating by 40%! In 2018, Bank of America Merrill Lynch found that firms with impressive ESGs in the long term of three years earn higher profits than colleagues and are less likely to go bankrupt. In addition, their shares are more likely to show high investment quality and less likely to fall sharply in price. In 2018, Maundy Asset Management was able to find out ESG. In European portfolios, management quality is particularly important, and in North American environmental factors. In particular, a 2017 study by Nordau Equity Research (the largest Scandinavian financial group) shows that between 2012 and 2015, the performance of companies with the best ESG ratings exceeded the performance of companies with the worst rating by 40%! In 2018, Bank of America Merrill Lynch found that firms with impressive ESGs in the long term of three years earn higher profits than colleagues and are less likely to go bankrupt. In addition, their shares are more likely to show high investment quality and less likely to fall sharply in price. In 2018, Maundy Asset Management was able to find out ESG in European portfolios, management quality is particularly important, and in North American environmental factors. A 2017 study by Nordau Equity Research (the largest Scandinavian financial group) shows that between 2012 and 2015, the performance of companies with the best ESG ratings exceeded the performance of companies with the worst rating by 40%! In 2018, Bank of America Merrill Lynch found that firms with impressive ESGs in the long term of three years earn higher profits than colleagues and are less likely to go bankrupt. In addition, their shares are more likely to show high investment quality and less likely to fall sharply in price. In 2018, Maundy Asset Management was able to find out ESG in European portfolios, management quality is particularly important, and in North American environmental factors. A 2017 study by Nordau Equity Research (the largest Scandinavian financial group) shows that between 2012 and 2015, the performance of companies with the best ESG ratings exceeded the performance of companies with the worst rating by 40%! In 2018, Bank of America Merrill Lynch found that firms with impressive ESGs in the long term of three years earn higher profits than colleagues and are less likely to go bankrupt. In addition, their shares are more likely to show high investment quality and less likely to fall sharply in price. In 2018, Maundy Asset Management was able to find out ESG in European portfolios, management quality is particularly important, and in North American environmental factors. That from 2012 to 2015, the performance of companies with the best ESG ratings exceeded the performance of companies with the worst rating by 40%! In 2018, Bank of America Merrill Lynch found that firms with impressive ESGs in the long term of three years earn higher profits than colleagues and are less likely to go bankrupt. In addition, their shares are more likely to show high investment quality and less likely to fall sharply in price. In 2018, Maundy Asset Management was able to find out ESG in European portfolios, management quality is particularly important, and in North American environmental factors. That from 2012 to 2015, the performance of companies with the best ESG ratings exceeded the performance of companies with the worst rating by 40%! In 2018, Bank of America Merrill Lynch found that firms with impressive ESGs in the long term of three years earn higher profits than colleagues and are less likely to go bankrupt. In addition, their shares are more likely to show high investment quality and less likely to fall sharply in price. In 2018, Maundy Asset Management was able to find out ESG in European portfolios, management quality is particularly important, and in North American environmental factors. That companies with impressive ESGs in the long term of three years receive higher profit than colleagues, and are less likely to go bankrupt. In addition, their shares are more likely to show high investment quality and less likely to fall sharply in price. In 2018, Maundy Asset Management was able to find out ESG in European portfolios, management quality is particularly important, and in North American environmental factors. That companies with impressive ESGs in the long term of three years receive higher profit than colleagues, and are less likely to go bankrupt. In addition, their shares are more likely to show high investment quality and less likely to fall sharply in price. In 2018, Maundy Asset Management was able to find out ESG in European portfolios, management quality is particularly important, and in North American environmental factors. ESG in European portfolios, management quality is particularly important, and in North American environmental factors. ESG in European portfolios, management quality is particularly important, and in North American environmental factors.

The key to a new generation of sustainable investment is focusing only on the significant components of ESG that affect the value of the company. For example, greenhouse gas emissions are important for electricity suppliers, but not for financial firms; supply chain management – for a clothing manufacturer that attracts cheap labor in developing countries, but not for pharmaceutical companies (see the sidebar “Under the Sign of Significance”).

GROWTH OF DEMAND. Asset owners, such as pension funds, are increasingly demanding that managers follow sustainable investment strategies. Mary-Jane McMullen, portfolio manager and ESG investment program manager for Clear Bridge Investments (a $ 145 billion asset management company), claims that organizations calling them have increasingly mentioned ESGs in recent years. Where this does increased demand come from? The point is not only that advanced asset owners believed in high returns on sustainable investment. Many of them, including wealthy individuals, are also interested in non-financial results. “Our wealthiest customers want to be sure that their investments make the world a better place,” said Rima Kupfershmid-Rojas, director of sustainable finance at UBS Group, the company that manages the world’s largest ($ 2.4 trillion) capital.

The demand for responsible investment is so great that many asset management firms are hastily developing new proposals. The volume of sustainable and social investments in UBS has more than tripled since December 2016, reaching $ 17 billion. Head of Asset Management Michael Bollinger confirms: “We have a significant increase in assets in the social sphere and in the field of sustainable development. Customer demand has grown substantially over the past two years. ”

 

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