Over the last five years investors have changed their attitudes to responsible investing. In 2015 it was considered a niche investment strategy with many worried integrating environmental, social and governance into an investment portfolio would erode performance. But those concerns proved unfounded and the concept is now embraced by asset managers, investors and regulators. Four senior female executives discussed how investors’ attitudes have changed at a recent event to celebrate International Women’s Day.
Managing Partner MV Credit
Over the last five years the information on ESG factors in private markets has improved as companies have become more transparent in response to investor demand.”
ESG factors have always been a key consideration for private debt markets – the difference is in the past we referred to it as ‘downside protection’. It’s important for an investor lending to a company to know it has good environmental and social practices and is well governed because otherwise the company is likely to be subject to legal action or law change which would be detrimental to its cash flows.
It is a revolution led by the Nordic investors. In the last 5 years these institutions have expected more information on ESG characteristics of the companies in our portfolio and the trend that begun in the Nordics has evolved rapidly, spreading throughout the region. This is an initiative which started in Europe and is quickly becoming a global phenomenon. Two years ago both US and Asian investors viewed ESG as a box-ticking exercise. Now it as an important factor.
ESG is not just about the way you invest, it’s also about how asset managers run their own business. Institutions want us to demonstrate we practice what we preach. This is a very healthy – and long overdue – development for the industry.
Executive Managing Director and Co-Head of Western Europe Natixis IM
In the future, it’s likely the capital charges imposed on insurance companies will vary according to the climate-change risk associated with a particular investment.
A decade ago Nordic investors started this revolution by excluding companies. This evolved into integrating an analysis of ESG factors into the investment process, which allowed them to select the ‘best in class’. This has now evolved further into ensuring investments make a positive social impact and a greater focus on ensuring investors act as responsible corporate stewards.
Over the last three to four years a rapid increase in the demand for ESG integration has come from insurance companies. Assessing environmental risk is part of an insurer’s DNA, as they are often underwriting risk for severe weather events such as hurricanes and floods. In a recent survey we conducted, 67% of worldwide insurers said they either already do include or are thinking of including ESG and climate-change factors in their investment policy. Insurers started this trend and pension schemes followed. Now other wealth managers and family officers are following in their footsteps.
Over the past two to three years, investors want managers to demonstrate the impact of their investment. They demand proof the carbon footprint has been reduced and want to know the ‘temperature’ of the portfolio – in other words, that the allocations will help to mitigate global heating.
CEO Vauban Infrastructure Partners
Today all investors require us to report on ESG and what used to be a niche strategy has become mainstream . It is less easy to ascertain, however, whether all of them now believe in responsible investing.
Five years ago, when we explained to a potential investor about our commitment to responsible investing one of them replied: “Well, good for you!” Even when I was invited to panels to discuss responsible investing, others would say they only cared about producing returns and were not interested with this part of the investment strategy.
While US investors have been late adopters of this strategy, their approach is very thorough. They want detailed reports and for us to benchmark ourselves to our peers. They want us to commit to improving our ESG performance and demonstrate how we have had a positive impact. And I’ve also had some interesting questions from investors in the Nordics which wanted to know whether the men were using their paternity leave option at Vauban. They want to know there is dual equality between the genders.
Global Head of Market Strategy Natixis Investment Solutions
Assessing these factors will become standard procedure for investors looking to build sustainable portfolios.
As financial markets become increasingly fixated with the short-term changes and the influence of social media grows, investors are instead thinking about longer term risk factors. That’s not only about ensuring companies avoid environmental problems but also thinking about strong governance and good social policy. These issues can also be expensive for businesses if they are not done well.