Making Sense of ESG

Take a closer look at the current and future state of environmental, social, and governance (ESG) investing, the metrics that matter, and growth outlook.

Featured Experts from the Natixis Investment Managers Summit:

  • Scott E. Kalb, Chairman, Sovereign Investor Institute; Director, Responsible Asset Allocator Initiative, New America
  • Fiona Reynolds, Chief Executive Officer, Principles for Responsible Investment
  • Diane Strauss, Research Director, Yale Initiative for Sustainable Finance, Yale University
  • Moderator: Ed Farrington, Executive Vice President, Natixis Investment Managers
Sustainable investment is on a roll. A 2017 Natixis Investment Managers survey showed 61% of institutional investors agreeing that incorporating ESG factors will be standard practice for all managers within five years.1 ESG’s emphasis on transparency also strikes a natural chord among the Millennials who will make up 75% of the world’s workforce in 2025.2 But there’s still work to do: More companies need to be persuaded to report on their ESG performance, and sustainability criteria need greater standardization. Persuading institutional investors to incorporate ESG strategies requires sensitive handling too. But as a new generation asserts its views, sustainable investment strategies are receiving ever-wider acceptance.

Responsible investment: in tune with the times
ESG is no longer about feeling good. It’s about doing well. “It’s exciting to see that investors are starting to see why they should be integrating ESG criteria into their asset allocation,” Diane Strauss told the Natixis Investment Managers Summit. The UN-supported Principles for Responsible Investment (PRI) has seen its signatories rise from 60 twelve years ago to almost 2,000 today, representing some $85 trillion in global assets.3 Boosted by such global moves as the Paris Agreement and the UN’s Sustainable Development Goals, ESG is now a hot-button issue.

A rational choice
“Sustainable investment should be an obvious idea. You want to invest in companies that are creating a sustainable future because doing the opposite would not be good,” said Ed Farrington.

His view is shared by PRI’s CEO Fiona Reynolds, who defines responsible investment as trying to align people, profit and the planet. “The three should go together,” said Reynolds. “It’s not OK to invest money at any cost.” As an investment strategy, ESG also has a solid economic rationale. Recent academic evidence shows that companies that outperform on ESG metrics tend to outperform on economic and financial criteria too, Scott E. Kalb explained.

Room for improvement
And yet much remains to be done. Kalb points to findings from the Responsible Asset Allocator Initiative. ”One of the questions we ask is how many of the funds actually report on their ESG performance. Among the global group, it is about 53%, so we still have half of the funds not reporting... and in the US, it’s only about 15%,” said Kalb.

The indicators used to monitor ESG performance also need to be standardized, both to prevent greenwashing and to better evaluate the impact of investment decisions. “We’re never going to get identical ESG data, because different people are looking for specific issues,” said Reynolds, “but we do need some standardization around basic ESG issues.”

Getting the message across
In addition, ESG is a subject that needs to be handled the right way. “My constituents have an important mission,” said Kalb. “They need to ensure they make an appropriate risk-adjusted return to meet their people’s retirement benefits, healthcare and long-term savings. They’re very suspicious of people who come in and tell them what to do.” Instead, Kalb informs them of the risks they could be running by not taking ESG factors into account. He also adopts what he calls a “why not” attitude: “I tell them that you can invest in a sustainable infrastructure project without hurting your performance. So why not do it?” As institutional investors feel the pressure from Millennials keen to align their investments with their beliefs, more and more of them are indeed asking: Why not?

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1 Natixis Investment Managers, Global Survey of Institutional Investors conducted by CoreData Research in September and October 2017. Survey included 500 institutional investors in 30 countries.

2 "Defining generations: Where Millennials end and post-Millennials begin". Pew Research Center. March 1, 2018. Accessed November 05, 2018.

3About the PRI.” Principles for Responsible Investment. Accessed January 7, 2019.

Environmental, social and governance (ESG) investing focuses on investments in companies that demonstrate adherence to environmental, social and governance (ESG) practices, therefore the universe of investments may be reduced.

Greenwashing is the use of marketing to portray an organization's products, activities or policies as environmentally friendly when they are not.

Risk-adjusted return defines an investment's return by measuring how much risk is involved in producing that return, which is generally expressed as a number or rating.

Sustainable Development Goals are a collection of 17 social, environmental and economic goals set by the United Nations General Assembly in 2015 that frame the global agenda for sustainable development. The aim is for all countries to achieve the goals and their targets by 2030.

Speaker opinions may not necessarily be those of Natixis Investment Managers. Not all speakers are employed by Natixis Investment Managers, but may receive compensation for their services. Content should not be considered a solicitation to buy or an offer to sell any product or service to any person in any jurisdiction where such activity would be unlawful.

The Natixis Investment Managers Summit was hosted by Natixis Investment Managers. Natixis Investment Managers includes all of the investment management and distribution entities affiliated with Natixis Distribution, L.P. and Natixis Investment Managers S.A.