ESG. There's a lot packed into those three letters. The Environment. Social concerns. Corporate governance.
From plastic piling up in our oceans to equal pay for minority groups to protecting human rights, so many important issues are linked to ESG. While we endlessly debate the use of plastic straws, or how much beef we eat, nothing will have as much effect on climate change and the future health of our planet as how we invest our money.
Over the course of a day my colleague took a picture of the ways brands communicated on matters that link to ESG:
Almost every interaction was linked to themes that fall under ESG and sustainable investments. Companies are communicating with us in this way because they understand we are changing our purchasing habits to reflect our values.
For me, ESG provides one of the first opportunities for asset management firms to show they have a human side. It allows investment managers and big corporations to speak in human terms to their audience about issues that aren’t solely related to returns.
Helping listed companies change
Listed companies in the United Kingdom are now required to share a degree of environmental and social impact reporting in annual reports. Shareholders now have an opportunity to publicly challenge boards these reports and what practical steps they are taking to improve things.
There are consequences for companies that aren’t fulfilling their ESG criteria.
Just last month we saw M&G make a challenge to Methanex, a Canadian chemicals company. As their largest single investor M&G argued they would force a sale of one of Methanex's portfolio companies unless they brought on a partner to offset financial risks.
Methanex complied, showing just how much influence shareholders have to change behaviour.
Does your generation matter?
It is easy to think ESG is a millennial and Gen X campaign. It is true that millennials and Generation X stand to inherit $30 trillion over the next 30 years.[1], making them incredibly important to the investment community. However, it is very likely that we link these issues with millennials because they are more visible, most have grown up expressing views on Twitter or sharing an Instagram post on a favored cause.
We interviewed several investment managers and marketing managers at asset management companies as part of our research. Each has fed back that this is a conversation that comes up with clients of all ages now. Parents are beginning to take a more active interest in what their children care about; in fact they care about these issues themselves and want to shift their investment patterns to reflect this.
This is most likely why we have seen ESG removed from sub-sections of asset managers websites, replaced with large features on home pages, prompting us to download their latest research.
Let’s be practical about money
When looking at long-term investing, we are beginning to see that ESG and strong returns actually go hand in hand.
According to HSBC, decisions about ESG investing and financing are increasingly financially driven. 74% of investors cite financial returns as being a key factor in their decisions about ESG, while two thirds of issuers consider tax incentives important.
In Blackrock’s Sustainable Investing: a ‘why not’ moment, ESG portfolios were reviewed against standard portfolios. The results revealed that in equities investors do not need to choose between strong returns and ESG investing: both portfolios show very similar returns both in emerging and developed markets. In the less-established bond market, over the past decade, bonds with higher ESG ratings have typically generated stronger information ratios – a gauge of risk-adjusted returns – despite their lower yields.
Given the growing trend in strong returns, it seems fair to predict over the next 10 years the question will not be ‘do you invest in ESG?’ but ‘why don’t you invest in ESG?’. It will be a difficult question to answer and may ultimately mean asset managers lose mandates.
The future
Creating an ESG or sustainability profile is becoming a fundamental part of a company’s success. To overlook it in a marketing strategy is to miss an opportunity to build a strong relationship with clients on issues that they consider part of their identity. It’s an emotional issue for investors and one that allows asset managers to open up.
Time will be the biggest test for ESG portfolios, however given the early indications of strong performance and multi-generational appeal, it is hard to see how this type on investment won’t dominate the landscape moving forward.
I for one am excited to see how the industry continues to develop and communicate with a global audience.
Francesca Bliss is a senior account manager in Cognito's London office.The entire ESG Team contributed to this piece; get in touch to learn what we can do for you.
To read more on sustainability and marketing, read the other three parts of our ESG special: