Mounting interest in Environmental, Social and Governance (ESG) investing is helping build momentum for impact investing – and in particular support for the United Nations' sustainable development goals.
That is positive for the world’s emerging economies. But they still need to build robust processes if they want to win the trust of investors.
What is behind this upsurge in ESG investing?
I believe two factors are at work.
One is the general finding that funds incorporating ESG metrics perform at least as well as, and sometimes better than, those that pick their holdings from the broader market.
This runs counter to investing theory, which maintains that returns increase with the size of the investable universe. The more choice you have, the better your returns should be. Strict screening for ESG factors radically reduces that choice.
But several studies have shown there is no downside to ESG investing. Some, including a notable one from Harvard Business School, have demonstrated a clear upside. Similarly, indices based on shares that score high on ESG have generally outperformed their more general peers by a small margin over the longer term.
Fund managers now engage with companies to understand their ESG performance, their values and the sustainability of their business model, integrating these insights into their standard analysis to highlight not just risk but also opportunity.
The moral of all this is that by adding ESG metrics to the tools you use as a fund manager can actually enhance returns.
So why not do just that?