A new ESG report, backed by Aegon Asset Management, highlights the steps required to narrow the gap between intent and action in sustainable and responsible investment.
The good news in the report is that environmental, social & governance (ESG) investing is no longer a minority activity, with three out of four investors taking account of ESG information in the investment process.
Entitled "Going mainstream – The future of ESG investing", the report examines the current practices and the outlook. It finds that the growth of ESG investing has been boosted by the Paris Climate Accord, and the adoption of the UN Sustainable Development Goals (SDGs) in 2015. Climate change is perhaps the most important driver, with 65% of investors listing it as their top priority, and a further 50% expecting to have divested from fossil fuels by 2030. About 60% of investors also has a specific policy in regard to the SDGs.
However, the report highlights that there is a "significant gap" between intent and action. Many investors are struggling with a lack of relevant investment information, and a scarcity of ESG investment vehicles. As a result, investors struggle to adopt ESG across their portfolios: just one-quarter of all assets globally are currently managed under ESG strategies.
The report argues that for sustainable investing to become the norm, corporate reporting and standards need to be improved, including, where appropriate, by the introduction of regulation. Otherwise, there is a risk that the current push to give investments the ESG label turns it into a box-ticking exercise.
Beyond this, the report stresses the need for a change in mindsets. Sustainable investing is often thought of as low-yield, yet data on investment performance show ESG investment strategies can deliver both higher returns and a reduction in volatility. To grasp the opportunity, investment professionals need better education and incentives. Interviewees also agreed on a need to create awareness among the general public, who have the power to demand more from those that manage their investments.
"The results of the research challenge long held assumptions and prejudices about the use of ESG data in making investment decisions," says report author Harry Hummels, Chair in Ethics, Organizations, & Society at the Finance Department of Maastricht University. "Yes, there is work to be done to accelerate change, but we are witnessing a trend which is clearly positive, inspiring and hopeful."
Growing and maturing
The report is published by Newsweek Vantage, the research and analysis division of Newsweek Media. The conclusions are based on a study of over 280 asset owners and managers across the world, as well as 12 in-depth interviews with investors and practitioners in ESG investing.
Aegon Asset Management (AAM) was a sponsor of the report, along with UBS, Axa Investment Managers, Triodos Investment Management, Principles for Responsible Investment (PRI) and US SIF.
Commenting on the message in the report that ESG strategies will grow and mature, Harald Walkate, Global Head of Responsible Investment at AAM, said investors are coming to the end of the experimentation phase. "I think we are at a turning point – we are increasingly seeing investors taking a more technical approach towards sustainable investing, for example in how they are approaching climate investment risk."
Aegon and responsible investment
AAM developed its first Responsible Investment (RI) Strategy in 2010. The focus was on three strategic areas: ESG integration, impact investing and active ownership (exclusion/negative screening, voting, and engagement).
Since then, it has reported annually on its ESG activities and has continually expanded its portfolio of investments, including adding over $1 bn to its impact investment portfolio in 2017.