7 min read 2 Oct 20
Summary: The top priority for most long-term investors is to grow their capital for the future. This is the responsibility we, as asset managers, take on as stewards of our clients’ investments.
Our ambitions can be even broader, however. We can aim to not only invest profitably over the years, but to do so in a way that minimises costs to the planet and to society. Responsible investing recognises that we can succeed in both these goals.
There remain a few myths, however, that could be holding investors back from putting their money to better work. Here, we look to dispel them.
There are a number of different approaches to responsible investing, and the language used to describe them can sometimes be confusing. Values-based or ethical investing allows investors to avoid sectors or companies they feel don’t reflect their views. But values are subjective. What is acceptable to one person might not be to the next.
To go beyond good intentions, and apply rigour in our efforts to invest responsibly, investors need a framework. The dominant approach has become known as ESG, where environmental, social and governance factors are incorporated into investment decisions by fund managers.
ESG incorporates analytical and modelling tools to identify all of the factors affecting a company’s long-term success, beyond just what companies disclose themselves. There are even ESG ratings that can help guide investors, much as credit ratings do.
Applying an ESG framework provides more than a clear conscience. If successful, it can offer a repeatable process to manage risks and identify opportunities.
Some of the risks modern companies face, both known and unknown, were less prevalent in the past and, in some cases, didn’t even exist. It is through grasping the non-financial drivers of the business – the ESG elements – that these risks can be properly understood and mitigated.
This is why, at M&G, we explicitly and systematically include ESG issues in investment analysis and decisions across our equity, fixed income and property funds, where these are meaningful to risk and potential return.
The traditional narrative dictates that if you want to invest responsibly, however, you must expect to compromise on any financial returns you receive.
Not only have a range of studies de-bunked this assumption, but there’s a growing body of data and research – from Oxford to Harvard – that suggests investment strategies integrating ESG have outperformed over the longer term.
A comparison of total returns from the shares of companies with high ESG scores with the overall global stockmarket backs this up. In the period ending 31 August 2020, the MSCI ACWI ESG Leaders index, comprising companies with higher ESG scores than their peers, has outperformed the MSCI ACWI index of the largest global company shares – albeit marginally – over three, five and 10-year periods.
|Annual returns to 31 Aug 2020 (US $)||
|MSCI ACWI ESG Leaders||10.3||11.2||10.9|
Source: MSCI, 9 September 2020
Remember, past performance is no guide to future performance. The value of investments goes up and down, meaning how much your investments are worth will fluctuate over time, and you may not get back the original amount you invested.
The implications of poor governance, and of disregard for the environment, employees or local communities, are likely to undermine a company’s long-term performance, in some cases irreparably. For investors holding that company’s shares or debt, that could spell permanent financial losses.
Investors like us have a major role to play. Integrating ESG into the investment process is about more than simply choosing companies that score highly in third-party analysis.
At M&G, we undertake constructive engagement with company management that aims to better understand their ESG strengths and weaknesses, and to encourage better ESG practices where appropriate. Where companies fall short of ESG standards, we are committed to holding them to account.
The principles underlying ESG investing are not new, but there has been a surge in investor demand for funds that invest according to them. Based on data from the Global Sustainable Investment Alliance, the amount invested in socially responsible strategies globally is more than US$30 trillion.
Growth in ESG investing is not only being driven by investor demand, but also the investment industry itself. The number of asset managers – M&G Investments included, since 2013 – that have signed up to the United Nations Principles for Responsible Investment (PRI) has risen sharply. Signatories to the PRI confirm that investors will incorporate ESG issues into their investment analysis and decision-making processes.
As investors increasingly seek ways to promote positive outcomes, and more effectively mitigate risk in the investments they make, integrating ESG into investment management – weighing up all the financial and non-financial elements of a company’s investment case, and engaging with companies on these issues – is the pre-eminent framework to achieve these aims.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.