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What to Expect in ESG’s Time of Transition

The past year has marked a time of record inflow into funds and products that promote good environmental, social, and governance (ESG) practices at investee companies. But legislators and other market movers are still underestimating the impact of such factors on the long-term health of not just financial markets, but wider society and the planet as a whole.

“Companies increasingly are able to quantify their actions on ESG issues, but not many can turn this information into what it means to the business financially,” says Elena Philipova, Global Head, ESG Proposition, at Refinitiv. “In turn, this means that companies and investors are not monetizing the full values of the sustainability business case. That said, I expect many improvements in that regard, powered by continued innovation, stronger regulation, and tougher systematic market risks hitting closer to home.”

A mainstream movement

For Cyril Blanchard, Refinitiv’s Market Development Manager in Continental Europe, the progress made over the last year is cause for celebration. He points to moves such as Amundi’s decision to generalize its ESG criteria, or the fact that 253 new companies signed up to the UN’s Principles for Responsible Investment in 2017, according to the organization’s 2018 annual report, representing the addition of $82 trillion of managed assets.

The European CFA Institute conference held in Paris in November 2018 was also a landmark moment. “ESG was one of the main topics on the agenda,” Blanchard says. “Some 56 percent of attendees reported that they now consider ESG a mainstream practice and not an alternative asset class anymore.”

This mainstream move is a trend that many predict to continue, including Birgit Hermle, Market Development Manager in Continental Europe for Refinitiv. She believes ESG factors will become a top priority for asset managers across the spectrum.

“There will be no investments made in companies who don’t fulfill the set environmental requirements for investment, for the reason of reducing risk,” she says. “There may even be transactions which lead to disadvantages for minority shareholders.”

This refocusing from asset managers will be somewhat led by Millennials, who are more switched-on to environmental and social issues than their predecessors. As the intergenerational transfer of wealth switches capital over to such investors, asset managers will correspondingly increasingly focus on ESG issues.

Shareholder rights

Barnabas Acs, Market Development Manager in Europe North at Refinitiv, predicts that Northern Europe’s focus will be on “higher activity in shareholder rights management,” particularly how ownership information, activist investor data, and ESG metrics are handled.

“There’ll be more scrutiny of the public and regulators,” says Acs. “ESG factors will increasingly be used to support wealth management decisions and transparency.”

Paul Hewitt, Refinitiv’s Market Development Manager in APAC, currently sees similar forces in the East. Since the Japanese Pension Investment Fund, otherwise known as the Government Pension Investment Fund (GPIF), signed up to the UN PRI in 2015, inflows into responsible funds in Japan have accelerated: in the last year, the value of ESG-integrated funds in the region has grown by 182%.

“It’s very difficult to make generalizations regarding Asia, as each market has its own priorities and is at different stages of incorporating and integrating ESG considerations,” Hewitt says. “But the rise of index funds is driving the importance of corporate governance. These funds are in for the long haul with companies, and are seeking greater voting rights and increasing board engagement to drive sustainable long-term growth.”

ESG investment products

An increasing number of private asset managers are taking green issues more seriously, and new ESG products are also expected following innovations such as Credit Agricole’s green bond emission, introduced in 2018.

Acs also points to more “thematic” products, such as resource protection funds or diversity and inclusion-focused instruments, coming to the fore, along with further refinements of existing sustainability staples like fund ratings and the quality of ESG data.

“In Canada we are seeing a trend where asset owners are becoming even more sophisticated with their in-house sustainability talent,” says Hugh Smith, Market Development Manager in Americas at Refinitiv. “This has created the need for more raw, transparent, auditable ESG data – rather than ESG ratings or opinions provided by a third party – so that can derive their own opinion about the sustainability of a holding or potential investment.”

Demand for data is also trickling downstream from asset owners to asset managers hoping to win their mandates, and then on to corporations hoping to attract investment from asset managers, and to sell-side research houses hoping to engage with their buy-side counterparts.

“If the industry and practice of ESG investing is to continue this evolution, real quality has to be driven from within — starting with the availability of quality, independent data by which accurate and important investment decisions can be made,” says Philipova.

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