Managers Seeking to Cater for a Wider Spectrum of ESG Appetites

Impact and thematic investment options grow in popularity, as investor palates become increasingly sophisticated.

There is growing interest among investors in multiple flavours of ESG investing, according to managers speaking yesterday at an ‘ESG for Inclusion’ panel, during Reuters’ two-day ESG Investment Europe 2020 virtual summit.

Claiming to offer ESG-based funds to long-term investors is no longer a sufficient source of differentiation, they admitted, with clients increasingly looking for nuanced, tailored approaches to fit specific needs and goals.

“Our clients really appreciate differentiated views of ESG applied to different markets,” said Jake Otto, an Investment Specialist at Wellington Management. “We believe there isn’t a ‘one size fits all’ approach that can be applied to all markets and styles of investing, whether quantitatively or fundamentally based, or for near- or long-term time horizons. All those things need to be considered when you are analysing ESG and incorporating it into your own investment process.”

Investors need to take a close look at both the approach and process of managers offering ESG-based solutions, according to Ilaria Calabresi, Sustainable Investing Lead for EMEA and Asia at JP Morgan Private Bank.

“When we think about ESG data – different managers will put different emphasis on different points; for example, environmental considerations might have a greater weight in sectors such as energy, and lesser weight in the financial sector,” she said.

As managers are “moving down the spectrum”, they are not just offering ESG integration, but also thematic and impact investing to differentiate themselves, she added, citing figures from the Global Sustainable Investing Alliance, which suggested reduced appetite for exclusionary approaches, and faster AUM growth in funds specialising in thematic and impact investing than in ESG integration.

“Investors are trying to figure out ways they can integrate impact and thematic investing into their asset allocations, even though the space is relatively nascent, especially in the public market,” said Otto. “Impact investing has been going on in private markets for a very long time but it’s only in recent years we’ve seen those concepts being applied to public markets in a way that is really scalable,” he said.

Although some investors think of different ESG-based investment strategies as vertical silos, the reality is more of a blend of approaches, observed Calabresi. “As investors have different preferences and objectives, for example, not just focusing on ESG integration, but also capturing long-term growth opportunities and creating social and environmental impact, asset managers also see the benefit of [providing] different approaches to sustainable investing,” she said.

Elaborating on strategy differentiation, Gavin Smith, Head of Equity Research at QMA, said, “It’s about trying to capture those incremental ESG insights that no one else has and try and get that return. The complexity [of differentiation] leads to different potential outcomes across ESG strategies.”

Differentiation through a focus on returns does not necessarily blunt the power of sustainability-led funds to drive change, added Smith, asserting that the pursuit of ESG-based metrics by investors sheds greater light on practices, providing a powerful motivating force for corporate management to instigate reform.

The ongoing growth in the range of options available within the ESG investing space placed greater emphasis on communication, noted Calabresi, both to address client misconceptions and to ensure understanding of different investor objectives, which might include aligning portfolios with principles, risk mitigation, or value creation linked to sustainability.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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