As environmental, social, and governance-centric (ESG) investment styles continue to ramp up in the investor community, a number of claims seeking to stunt its growth have popped up. Dr. Maximilian Horster, managing director and head of ISS-Ethix Climate Solutions, and the Defined Contribution Institutional Investment Association (DCIIA) prepared reports that offer compelling arguments to debunk a multitude of common claims, or “myths,” concerning ESG-focused investments.
One of the more detrimental claims given regards the dis-alignment of ESG investing and fulfilling one’s fiduciary responsibilities, with ESG detractors saying the two cannot be done simultaneously to a high degree of success. Dr. Horster pointed to a Morningstar study examining 54 sustainability-focused equity index funds, and found that 73% outperformed their peers. Additionally, ESG investments on average provide for more stable portfolio returns, with 84% of funds exhibiting lower volatility when compared to non-ESG funds, he said.
“If done right, ESG can de-risk and generate outperformance,” Horster added. The DCIIA added that “fiduciaries should appropriately consider factors that potentially influence risk and return,” and that “environmental, social, and governance issues may have a direct relationship to the economic value of a plan’s investment. In these instances, such issues are not merely collateral considerations or tie-breakers, but rather are proper components of the fiduciary’s primary analysis of economic merits of competing investment choices.”
Dr. Horster also touched on another floating myth regarding the lack of data regarding ESG investments, and the relatively low quality of data that is available.
“We are measuring every year, how the quality of companies that report on ESG is improving over time,” he said. He noted that the “blind spot” for ESG reporting has been emerging markets over the last few years, however recent changes, especially from China and Hong Kong, has caused emerging markets to shoot “through the roof in adopting the reporting of their gas emissions.”
The DCIIA’s report added that existing data and studies have demonstrated positive benefits from ESG themes, such as improved net-of-performance relative to non-ESG-themed funds, and increased portfolio value.
Horster added that ESG firms are taking strides to become more robust investors, and stepping outside of a niche lens by the market. “This is a development that is rather recent, and it’s quite mind boggling how this took off,” he said, referring to ESG investors ramping up their strategies and portfolios.
More than 2,000 asset managers with combined assets under management over $90 trillion have signed up to the “Principles of Responsible Investing” organization, a far cry from being a “niche” space.
On top of this, the European Union recently said it wants European investors to measure themselves against a new set of benchmarks, “and these benchmarks either consist of companies that are transitioning on the topic of climate change, or they are even 2 degree lined,” Dr. Horster added, in a speech given at CIO’s 2019 Summit event in May.“ESG is increasingly a source for outperformance. It’s not always a guarantee for it, but it can be done, and it is being done,” he said.
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