Better returns, not altruism, are driving investors to ESG –


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Who’s really driving the Responsible Investing agenda – and why?

t its heart, responsible investing is about incorporating social and environmental impacts into decisions about capital allocation – and vice versa. Managers controlling more than 30pc of global investments now consider these issues at some level, and many, including our firm, incorporate them into every investment decision we make.

That’s a lot of financial muscle. In a world where many governments are turning inward, capital is becoming more outward looking. To a meaningful extent, investors and fund managers are starting to tackle cross-border challenges such as climate change, resource scarcity and biodiversity as well as industry and company specific issues relating to equality, labour conditions and corporate governance.

Why have we seen this change in investor behaviour? After all, capitalists are not typically regarded leading lights in the fight against climate change, let alone advocates for greater diversity, or for stakeholders rather than shareholders.

A common view is that this is a result of increased regulation, such as the EU’s Sustainable Finance Disclosure Regulations, which came into effect earlier this month.

I spend a lot of time talking to our clients and their advisors right around the world and it’s clear to me that the real drive for change is coming first and foremost from the asset owners – whether institutions or individuals.

And, importantly, it is motivated primarily by the principles of risk and return, not regulation, philanthropy, social justice or ideology.

Climate change surely represents the single biggest risk to the global economy

Crucially what has changed since the days of ‘ethical investing’ is that many long-term investors have decided that what is bad for society and the environment is also bad for their investments.

For example, climate change surely represents the single biggest risk to the global economy. Therefore, investing in fossil fuel companies that are doing little to address the issue is a bad investment in the long term. It may also be a poor investment in the short term as the entire business model of those companies comes under severe threat.

Mindsets and behaviour are changing, as is the thinking on fiduciary duties, historically seen as a barrier to responsible investing. It is now widely accepted that it may be a violation of fiduciary duty not to consider environmental, social and governance (ESG) factors in building portfolios.

Of course, the momentum towards responsible investment is not just seen among very large investors. Individual investors are also showing strong interest in the topic, right around the world. One feature we particularly notice is the extent to which ‘millennial momentum’ is a factor.

Younger decision makers are more engaged on sustainability issues than their predecessors, and as the millennial generation moves up in seniority and influence within organisations, they are far more concerned about not only the size of their future financial wealth but also the kind of world they’re going to spend it in.

Another very interesting aspect of the surge in responsible investing is the extent to which corporate leaders have realised that if they don’t consider the long-term impact of their actions they will be punished by markets, while those who do address it will be rewarded.

We see this first-hand. KBIGI have an active programme of engagement with the companies we invest in on a variety of sustainability issues.

Most significantly, we are now asked by many of our clients to quantify and report on the impact these investment strategies are having relative to benchmarks such as the UN Sustainable Development Goals.

Just this month for example, we are launching new sustainable equity investment products in Japan, Singapore and the US – all with local distributors, specifically to meet the demand from individual investors for responsible strategies investing in companies engaged in areas such as water, clean energy, sustainable infrastructure, energy efficiency and agribusiness – all exciting growth areas.

The investment management industry does have a role to play, and it is positive to see some of the world’s largest players, including our own parent group, Amundi, showing leadership by integrating responsible investment principles in their processes.

Corporate behaviour is already changing more quickly than we could ever have expected.

Sean Hawkshaw is CEO of KBI Global Investors

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