In a world inundated with political polarisation and partisan scepticism, it's easy to get lost in the noise surrounding climate change, green-washing, over-regulation and what some may dismiss as mere ‘wokeness.’ Yet, amidst this tumultuous backdrop, a quiet revolution has been taking place within the investment industry.
Over the past decade, responsible investment funds have emerged as a steady force, defying all the sceptics, and maintaining market share while experiencing a surge in assets.
Indeed, despite all the political back-and-forth playing out on the world stage, both retail and institutional investors are emphasising a commitment to responsible investing that transcends partisan divides.
Recent research from CFA Institute underscores this transformative trend, revealing how investment firms have been increasingly incorporating environmental, social, and governance (ESG) factors into their decision-making processes. Responsible investment funds have not only maintained their market share but have grown steadily alongside the broader investment fund market - the global rise in assets reflecting a collective commitment to sustainability.
Misconceptions
One of the primary misconceptions among ESG deniers is the belief that prioritising sustainability and principled practices comes at the expense of financial returns. However, numerous studies have shown that companies with strong ESG performance often outperform their counterparts in the long run. Investors who integrate ESG factors into their decision-making process are better positioned to identify companies with robust risk management practices and strategic foresight, ultimately contributing to more stable and resilient portfolios.
ESG factors serve as a powerful risk management tool. Companies that neglect environmental regulations, social responsibilities, or governance principles are exposed to heightened legal, operational, and reputational risks. ESG-minded investors recognize the importance of avoiding these risks, leading to more resilient portfolios that are better equipped to weather unforeseen challenges and market fluctuations.
The world is witnessing a paradigm shift in attitudes towards sustainability and corporate responsibility. Governments, regulatory bodies, and consumers are increasingly demanding transparency and accountability from businesses. Companies that ignore or deny the significance of ESG factors risk falling out of favour with both investors and customers, jeopardizing their long-term viability.
Key determinant
ESG performance is becoming a key determinant in accessing capital. Investors are showing a growing preference for companies that align with their sustainability goals. As a result, companies with strong ESG credentials often find it easier to attract capital and secure favourable financing terms. ESG deniers may find themselves at a disadvantage as the cost of capital for such companies could increase over time.
Beyond financial considerations, ESG factors play a vital role in shaping a company's social impact and reputation. Consumers are increasingly making purchasing decisions based on a company's values and commitment to sustainability. ESG-conscious companies not only contribute positively to society but also build stronger relationships with customers, fostering brand loyalty and longevity.
ESG deniers are overlooking a fundamental shift in the investment landscape. The evidence is clear: integrating ESG factors into investment strategies is not only morally responsible but also financially prudent. As the global community continues to prioritize sustainability – our own members and candidates are demanding that more ESG-related content be included in our qualifications - ESG considerations will likely become even more integral to investment decision-making. Investors who embrace this shift stand to benefit from both a financial and moral standpoint, while those who deny the importance of ESG may find themselves on the wrong side of a transformative tide in the world of finance.
Distinct motives
CFA Institute research reveals that retail and institutional investors exhibit distinct motives for embracing ESG factors, complicating the global landscape for investment firms as they balance stakeholder interests and legislative considerations. For example, retail ownership dominates globally, but in the U.S., institutional assets surpassed retail assets in 2018, signalling a shift in demand preferences.
Understanding these shifts is vital for investment professionals, as they navigate a landscape where responsible investment funds play an increasingly significant role and explains why the CFA Institute is so active in supporting professional development in this area. Keeping pace certainly presents a challenge for the investment profession, not least in ensuring that we have sufficient knowledge and capacity; a key reason why CFA Institute choose to launch the Climate Risk, Valuation and Investing Certificate and to lend its support to the Capacity-building Alliance of Sustainable Investment (CASI).
In my view the journey towards responsible investing is not only about embracing change but accepting that we can shape a sustainable future where financial success can align harmoniously with social and environmental responsibility. However, in the face of mounting evidence and global consensus on the importance of ESG, there still exist sceptics and deniers who question its relevance. Outside of self-interest I’m not sure why anyone would argue that ESG makes anything other than financial sense.
Paul Moody is managing director at the CFA Institute, a Knowledge Partner of Investment Officer.
