Environmental, social and governance issues have long been associated with only having a social conscience, but the times are a changing.
“Negative screening is a lot of what people associate these ESG factors with, but that doesn’t seem to be the case anymore,” said Matt Orsagh, director of capital markets policy at the CFA Institute.
“It’s more about understanding the whole story of the companies you’re investing in. An oil and gas company has unique environmental issues you need to know about whereas a clothing retailer has distinct social concerns investors need to know about just to make sure those are sustainable businesses.”
With CRM2 highlighting the importance of advisors providing added value, taking ESG issues into account can help advisors stand out in the crowd and give them an advantage over their peers.
“People that understand opportunities that others might not see because of an improvement in governance or an improvement in health and safety or whatever it might be or risks that others may not see because they’re not looking at these issues can serve you and your clients well,” said Orsagh. “I would think that any advisor is the same as a hedge fund manager and asset manager; they need to understand these issues so they can understand the risks and opportunities are.”
It’s certainly becoming a bigger factor in the industry.
According to a survey, 2013 assets in Canada being managed using one or more responsible investing strategies had their value increased from $600 billion to more than $1 trillion in just two years. That represents a 68% increase in responsible investing (RI) assets under management.
The Responsible Investment Association of Canada attributes that growth to large pension funds using RI guidelines; many new entrants to the industry, particularly among investment managers; and qualitative factors including personal values, increased awareness of ESG risks, and generational transfer of wealth.
It’s taken more time than experts might have first though but change can also be seen in the fact that organizations like Reuters and Bloomberg provide a lot more information on ESG factors.
“It’s a cultural change in the investment process,” said Orsagh. “Any cultural change is going to be slow and gradual, going in fits and starts. But it’s going to gain momentum and I think we see now a lot more investors and a lot more ethical owners realiz(ing) it’s a potential way to better understand the risks and opportunities in their portfolio.”
Another factor is society in general has a better understanding of these ESG issues, separate from business decisions.
“I think there’s probably a little influence both ways,” says Orsagh. “Also you see an understanding of an issue like global warming or other social issues. Information is more readily available at the tip of your fingers and people are more informed and can be more informed about this kind of thing than 10 or 20 years ago.”