ESG (environment, social and governance) investment strategies continued to enjoy a significant increase in assets, rising $2.5 trillion in just two years to $8.7 trillion in the U.S. alone*. Over the next few decades, $30 trillion may pass to the next generation in the private wealth market, which would fuel the ESG trend**. Investors new to the ESG space may find it a challenge to know where to start when seeking out an ESG strategy, as there seems to be an ever growing set of strategies available in the market place. However, there is no one-size-fits-all approach by managers to incorporate ESG principles into the investment process. Below we propose some ideas on what to look for in an ESG manager.
Looking for the right ESG fund? Understand the depth of the manager’s ESG expertise
Four Keys to Picking ESG Managers
The challenge is to identify which products are high quality, leveraging meaningful data and analysis in a thoughtful, innovative way that meets the investor’s needs. There is a myriad of different approaches to ESG investing which stem from the investment organization’s philosophy. When assessing an ESG product, there are four key points to bear in mind:
· Responsible Organization: A small subset of asset management firms have responsible investment principles engrained in the firm culture, philosophy and mission statement. It’s important to assess the firm’s overall commitment to responsible investing. This commitment can be deduced from the points below.
· Dedicated ESG Investment Professionals: Many firms focused on ESG investing have dedicated analysts who identify ESG issues relevant to specific regions and industries. They stay abreast of evolving regulations and policies, evaluate ESG data providers and systems, and educate their internal investment professionals. Alternatively, some firms incorporate ESG analytics into the traditional security analysis, embedded in the research process of the security analyst.
· ESG Research: Does the firm leverage ESG data and analytics in security analysis from a risk perspective? While many asset managers have the ability to screen out specific securities and industries based on client restrictions, few managers incorporate ESG analysis across investment decisions as an engrained component of portfolio construction.
· Shareholder advocacy: With a vested interest in a company’s ESG performance, many investment managers will work with portfolio companies to influence their ESG profile. There are several methods of working with companies to improve ESG characteristics such as voting shareholder proxies, engaging directly with company management, and engaging with competitors to enhance industry standards.
One More Key: Knowing Your ESG Investing Purpose
With such a broad spectrum of ESG options, the number of choices can be overwhelming. The foremost step in evaluating which approach is appropriate for any given investor is defining the purpose or goal of the ESG investments. Do you want to tilt toward environmental, social or governance issues, or all three equally? ESG investment approaches can result in varying levels of success. While qualitative, bottom-up research can provide more targeted ESG exposures and a more holistic view on a company, it can be more costly to implement. The use of third-party ESG data can be an effective way to reduce management fees, though may lack details on materiality and directionality. If third-party data is utilized, independent assessment and verification would be prudent.
We are of the firm belief that investors can benefit from seeking ESG-focused managers and do not need to forego performance to invest well. However, discernment is critical in the manager selection process.
With contributions from Trent Cohan
*2016 Report on Sustainable and Responsible Investing Trends. US SIF Foundation
By Mamadou-Abou Sarr, Global Head of ESG at Northern Trust Asset Management and Avantika Saisekar, ESG Product Specialist at Northern Trust Asset Management
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