After spearheading the Sustainable Investing initiative for a large wealth management wirehouse for several years, I found myself in transition this summer – and spent much of that time catching up with old and new friends across the ESG (environmental, social and governance) and impact investing ecosystem. This time has given me the opportunity to reflect on the state of the industry and the challenges it faces.
For example, the vast majority of assets that are reported in industry trends reports such as US SIF’s feature some form of ESG integration, whereby ESG aspects are incorporated into the investment process. This happens with varying degrees of discipline and weight placed on ESG, is usually implemented firm wide or at least on multiple strategies at once, and is often accompanied by some increased focus on shareholder engagement with respect to ESG topics. This trend is being driven by the need to comply with commitments made by signatories to the U.N. Principles for Responsible Investment (PRI) and/or to satisfy demands from institutional asset owners.
This is quite distinct from more dedicated ESG strategies, that are often labeled and marketed as such. Examples in equities include, in particular, positively screened ESG strategies (minimum level of ESG performance required for inclusion); ESG-tilted strategies (which seek to increase the portfolio’s ESG score while controlling other characteristics); sustainability-themed strategies (often with minimum revenue required from solutions-oriented activities); or a strong focus on driving positive change through shareholder engagement (often combined with one of the strategies above). Making such distinctions matters for wealth and asset management firms.
What is also striking is that many individuals with a preference for sustainability do not find ESG integration strategies compelling, in contrast with dedicated ESG strategies. The reason is that an investment process that takes ESG aspects into account (along with traditional financial considerations) but without imposing any minimum standards is very likely to generate portfolios that include ESG laggards. This can be at odds with what individuals expect from an ESG portfolio.
The first is whether to implement some for of ESG integration across the firm’s investment processes. This is increasingly demanded by a subset of institutional asset owners and also serves to fulfill commitments incurred by the PRI signatories.
The second is whether to launch dedicated ESG strategies, or in some cases reposition existing strategies. I would argue that this is necessary to capture a portion of the growing wealth management demand for ESG, as well as to serve the needs of the most dedicated institutional investors. Note that both approaches can be taken in parallel and are likely complementary in terms of the skills and resources involved.
Over time, some goals and targets will be better funded than others, and achievement gaps will diverge substantially across both indicators and countries. Any SDG-focused investment framework developed today should incorporate achievement gaps in order to remain relevant as 2030 approaches. Tools such as the SDSN or Bertelsmann SDG Dashboards (www.sdgindex.org) are a useful resource to this effect.
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