Asset managers increasingly turn to sustainable investment strategies
With more investors selling assets in harmful industries, closer attention is being paid to the profitability of sustainable investing strategies
The idea behind it is simple: investor activism strengthens companies' corporate and moral balance sheets. Experts refer to an environmental, social and governance (ESG) matrix against which performance is measured. This includes checking a firm's carbon footprint, wage level for low-end workers, waste disposal policy or involvement in so-called "vice" industries tobacco or defence.
The companies are then rated by global analytics firms like MSCI, which allows investors to pick and choose those that meet their standards.
The work involves hundreds of computations conducted annually, although ratings can be adjusted in real time, if, for example, it is discovered workers were paid below the legal minimum.
"There is no global approach here so it is quite challenging," although there were efforts to create industry standards and benchmarks, said Jessica Robinson, the chief executive of the Association for Sustainable and Responsible Investment in Asia.
At least US$13.6 trillion of professionally managed assets incorporated ESG concerns in their portfolio selection in 2012, according to ESG investment advocate Global Sustainable Investment Alliance. This represented 21.8 per cent of the assets managed professionally in the regions covered by the alliance.
Momentum for a more activist investment approach is growing among institutional investors. The trend was illustrated in September when the Rockefeller heirs to the Standard Oil fortune announced their US$860 million philanthropic organisation would divest its fossil fuel holdings.
They joined over 800 global investors who have reportedly pledged to sell their fossil fuels holdings as part of a campaign to promote clean energy.
One challenge remains convincing people it makes economic sense. As money managers push funds with names like "sustainable", "ethical" and "green", the evidence that such portfolios can both match the market benchmark and save the planet remains mixed.
"Being able to demonstrate that sustainable investments have a better financial performance than traditional is the Holy Grail," said Robinson.
Unfortunately for ESG fans, in a pattern that repeats itself across a broad range of comparative MSCI indices, the MSCI World ESG index returned 13.81 per cent over three years compared to the MSCI World index's 14.23 per cent. Over five years, the gap narrowed to 8.23 per cent and 8.53 per cent return for ESG and non-ESG World indices, respectively.
A direct comparison between ESG and non-ESG indices is unfair, argue supporters. For example, the fossil fuel industry received such high government subsidies it made it very difficult to compare performance across sectors, said Robinson.
"It's an investment style," and advocates did not do it just to make money, said Patrick Elmer, the head of philanthropy and sustainable investments at Credit Suisse, when comparing the returns ESG investors made.
Investors may have to look at the longer-term benefits that socially attuned companies can bring. And if enough investors join the movement, perhaps even repeat corporate offenders can be encouraged to reform.
