Global assets under management (AUM) linked to firms that have become signatories to the Principles for Responsible Investment (PRI) rose 195 per cent to USD62 trillion in April 2016 from USD21 trillion in 2010.
Investor expectations and regulations are driving demand for sustainable investing, says Moody’s Investors Service.
“Integrating ESG criteria into investment decisions should limit risks within portfolios and contribute to lower volatility and better performance in the long run. The effectiveness of these strategies however will have to manifest through the cycle, as well as across teams and strategies,” says Marina Cremonese, a vice president at Moody’s.
A Moody’s report – Asset Managers – Global: Sustainable Investing Strategies Give Active Managers A Means To Stand Out – shows several asset managers have an edge as early movers.
BlackRock and Amundi have demonstrated strong commitment to sustainable investing practices with clear and transparent policies, processes, communication and engagement. Standard Life Investment is building a brand name through active communication and targeted research reports. BlackRock counts over USD200 billion of assets ESG-screened and impact funds (environmental, social and governance).
Moody’s says sustainable investing strategies will likely continue to grow as demand rises, driven by large institutional investors such as pension funds, endowments and foundations.
The California Public Employees' Retirement System (CalPERS) requires its mandated investment managers to incorporate environmental, social, and governance factors into investment processes, and to report on those factors on a regular basis.
High net worth and retail investors are nonetheless playing an increasing role in the growth of sustainable investing, as relevant funds in Europe have nearly doubled over the last five years, having grown to EUR136 billion from EUR75 billion.
The emergence of the millennial generation is also giving the trend another boost. This generation is increasingly demanding investment solutions that ensure their money also has a positive environmental and social impact. Investors are becoming more attuned to ESG issues as policy initiatives promote environmental and social agendas. Ceres, the Principles for Responsible Investment (PRI) or the United Nations' Committee for Development Policy, are among several initiatives geared towards this aim.
Sustainable investment strategies range from exclusionary practices for certain portfolios and the application of social considerations to shareholder advocacy and the integration of ESG objectives into investment decisions with the aim of generating long-term competitive financial returns while at the same time achieving a positive societal impact.
However, the rating agency notes asset managers have to overcome several hurdles to make sustainable investing strategies work. These include an insufficient supply of investible products, such as green bonds, uncertain performance expectations, evolving disclosure regimes, limited ESG data and education.
Finding consistent, high-quality ESG data is a challenge, given a lack of universally accepted ESG definitions and standard reporting guidelines, although it is getting easier to find, especially for large, public companies, the report says.