Wealth Management: Investment Views – Responsible investments
Where we are today
As the pendulum swings back in many societies from a multi-decade era of profit-first, corporate-led expansion, responsible investing has moved from the margins to the mainstream of modern investment strategies.
Often referred to as sustainable investing or socially responsible investing, the umbrella term 'responsible investing' which we will use in this publication has its modern roots in the late 18th century movement to abolish slavery and its associated economic activities.
Fast forward to the 21st century and, at the corporate level, there is increasing recognition that companies have both a financial and social responsibility to their surroundings as climate change activism and populism put late 20th century free-market capitalism in the spotlight.
Against this backdrop, responsible investing assets have almost tripled in the last decade and today amount to around $30.7 trillion, nearly a third of global assets under management in five major markets (Figure 1).
Source: Global Sustainable Investment Alliance 2018
Regionally, responsible investing now makes up more than 60% of professionally managed assets in countries like Australia and New Zealand. Along with Japan and Canada, these were the fastest growing responsible investing markets in the two years to 2018. In global terms of assets under management, however, Europe remains the largest region for responsible investing with $14 trillion assets under management, with the US close behind.
In the financial community, responsible investing is now championed by the integration of environmental, social and governance (ESG) factors in investment and decision-making processes (see The Origins of ESG). Today, more than 11,700 public companies worldwide disclose ESG factors, from a company's carbon footprint to its community impact, and how it pays its executives to how it engages with issues as broad as poverty and gender inequality.
The responsible investing spectrum
Investing through the integration of ESG factors is in fact part of a broader spectrum in which one can partake in responsible investing (Figure 2). From traditional 'ESG-blind' investing where financial returns are the only measure with which to assess a company's track-record (Figure 2 A), through to venture philanthropy (Figure 2 D) and philanthropic donations (Figure 2 E), clients should be aware of the pallet of options which exist in today's market.
Focusing on those strategies which combine both impact with profit, we conducted interviews with our Wealth Management and Global Advisory divisions at Rothschild & Co. Through the interviews we shed light on the topics of responsible investing for Wealth Management clients and how responsible investing impacts businesses' approach to corporate governance and shareholder engagement. We will be publishing the interviews throughout the month of January.
The origins of ESG
In January 2004 the United Nations' (UN) Secretary General Kofi Annan wrote to some 50 CEOs of major financial institutions and invited them to support an initiative brought forward with the International Financial Corporation and the Swiss Government. The aim was to develop guidelines for the better integration of Environmental, Social and Governance (ESG) factors by investors.
18 financial institutions from nine countries responded to Kofi Annan's call to action by producing a landmark report called Who Cares Wins in 2005. In the report, they called for amongst other things:
- Analysts to better integrate ESG factors in their security and market analysis;
- Financial institutions to commit to integrating ESG factors in their research and investment processes;
- Companies to implement ESG principles and provide reports on related performance.
In 2006, the goal to integrate ESG into capital markets took a step forward with the launch of the UN's Principles for Responsible Investment. Meanwhile, the New York Stock Exchange launched its first Sustainable Stock Exchange initiative. During these years, debate raged over whether ESG integration could be achieved without impairing financial returns and, if so, whether companies' duty of care to their shareholders extended beyond the maximising of profit to the consideration of ESG factors.
This debate was settled in the years following the financial crisis. In 2012/13 reports by academics, such as George Serafeim, Bob Eccles and Ioannis Ioannou helped accelerate ESG's establishment in mainstream finance and demonstrated the positive financial impact ESG factors have in understanding corporate risks, strategies and operational performance. As the decade developed, increased shareholder activism and political pressure has seen listed companies start to integrate ESG factors into their business models, conscious that investors are themselves coming under pressure to select businesses which have a strong ESG track-record.
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In this Investment Views:
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