More investment firms are getting in on ESG — but probably not out of the goodness of their hearts
Fans of ESG investing may be pumping their fists over the recent moves by investment firms, banks, and financial-data providers to roll out new ESG-branded products. But they might find that those companies are focused less on values, and more on value.
“Investing by ethical and environmental standards is no longer mainly about making the world a better place, they say,” reported the Wall Street Journal. “It’s about making more money by avoiding losses.”
The past 18 months have seen new ESG initiatives from bond-buying giants like BlackRock, Pacific Investment Management Co. (PIMCO), and Franklin Templeton Investments, as well as midsize investment firms Neuberger Berman and Eaton Vance. MSCI and Bloomberg Barclays have also come together to deliver an ESG variant of the popular Bloomberg Barclays Aggregate bond indices.
According to the Journal, the rush to join the ESG club, particularly in bond markets, is to a significant extent being driven by the search for alpha. Citing BlueBay Asset Management analyst My-Linh Ngo, the report said the ESG movement is increasingly being driven by the view that it “makes for good risk management.”
Aside from that, ESG offers the chance to capture new revenue streams from the growing number of investors — particularly millennials and European institutions — that seek to invest in accordance with ethical and social goals. These include shunning firearms manufacturers or throwing support behind renewable-energy companies, according to analysts.
But there’s still the question of how well bond managers can make good on the promise seen in ESG: a systematic evaluation of variables like corporate governance, social stability, and other vital points that could lend strength or vulnerability to an investment prospect. Even before the recent rise in ESG interest among firms, finding a consistent way to measure ESG-related variables and integrate them into investment decisions has been a stumbling block.
“We have yet to see a credit-rating agency publish a transparent and detailed methodology for analyzing ESG considerations as part of their credit analysis,” said Jonathan Bailey, Neuberger Berman’s head of ESG investing, in a research piece in December.
Critics note that some ESG characteristics can be quantified, but other characteristics are qualitative and less measurable. Gender composition and youth unemployment can be boiled down to numbers, but it’s not so easy when considering a government leader’s proneness to corruption, for example.
That hasn’t deterred some active managers from trying. In February, Franklin Templeton global bond fund manager Michael Hasenstab announced the creation of an index that quantifies numerous ESG variables and uses them to generate a single numerical score for different countries, along with a forecast of how that’s expected to change in the medium term.
“What is really interesting is the one- to three-year forecast,” Hasenstab told the Journal. He has reportedly sold or made bets against Poland and the US, both having solid scores but also the highest potential for deterioration among the 44 countries on the firm’s ESG index. Conversely, he’s willing to invest in countries with poor social cohesion and governance as long as their scores are set to improve.