Investors See ‘Material Risk’ in Ignoring ESG

Asset owners expect environmental factors will be more material than traditional financial criteria in the next five years, according to a UBS survey.

Krisztian Bocsi/Bloomberg

Krisztian Bocsi/Bloomberg

Large investors believe ignoring environmental, social, and governance criteria when allocating capital would imperil their portfolios, according to a UBS Group survey.

Asset owners expect environmental factors will become more pertinent to their investments than traditional financial criteria over the next five years, with more than 80 percent indicating it would be a “material risk” not to integrate ESG factors, UBS Asset Management said Tuesday. In a study with news and research provider Responsible Investor, the firm probed more than 600 investors with about €19 trillion (about $21.5 trillion) of assets globally.

Seventy-eight percent of asset owners representing pensions, endowments, and sovereign wealth funds are already integrating ESG into their investment processes, with Europe being the most active region, the survey found. While such investing may feel good, PG&E Corp.’s bankruptcy this year underscored concerns that brushing off environmental risks such as the threat of wildfires can lead to investor losses.

“ESG is not ethical investing,” Saker Nusseibeh, chief executive officer of London-based Hermes Investment Management, said Tuesday during a roundtable discussion on responsible investing at The Lambs Club in New York. “It is trying to apply a set of matrixes. It turns out, that’s just old-fashioned, long-term investing.”

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Investors should be jumping at the chance to allocate to strategies tied to climate-change strategies, argued GMO founder Jeremy Grantham and a co-author in a recent paper. He said climate change has become a major risk to the economy as hurricanes, droughts, and wildfires cause record damage, and laid out a case for investing in green energy companies.

As investors embrace ESG, artificial intelligence may help shape their strategies. For example, Acadian Asset Management, a Boston-based quantitative investment firm with $97 billion of assets at the end of April, is evaluating the use of machine learning to pick stocks based on ESG factors.

Some asset owners are asking for a portion of their private-market exposure to be dedicated to impact investing, according to Julia Cormier, director of alternative investments at Russell Investments Group. Russell provides outsourced-chief investment officer services to pensions, endowments, and healthcare organizations, among other institutions. A European corporate pension client of Russell, for example, invested in a hospital to increase the number of beds available to local residents, Cormier said Tuesday in a phone interview.

Russell’s OCIO clients are expressing diverse views on how to integrate ESG-related factors into their portfolios. The investment style goes beyond screening out publicly traded companies that sell goods investors oppose, such as firearms or tobacco, Cormier said. “We’re definitely seeing an evolution.”

Just under half of investors (48 percent) who adopt ESG strategies view them as positive for financial performance, according to the UBS survey. Yet more than half have those surveyed admitted that they have not assessed the return impact of integrating ESG factors. That may be because the strategies are relatively new to their portfolios, according to the report.

This story was reported with assistance from Leanna Orr.