Asset managers will need to embrace the sustainable investing strategies and help their clients better understand and explain the broader risks associated with this concept at a both portfolio and the overall strategy level, according to Willis Towers Watson’s Global Investment Matters publication.
At the moment, both investors and asset managers find it difficult to construct and articulate ESG strategies as the concepts are not clear-cut while the financial impact of both environmental and social governance (ESG) risks and opportunities need to be carefully considered before selecting investments and building portfolios. Additionally, this approach will encourage in the future skewing the portfolio towards companies that rate highly on ESG criteria.
According to senior investment consultant at Willis Towers Watson, Jane Welsh, “many of the ultimate beneficiaries — superannuation fund members — as well as charities and endowments — are very switched on to sustainability and have strong feelings on the subject.”
“Whatever approach is taken, it needs to be underpinned by effective stewardship of the assets. Through effective voting policies and engagement, asset managers can influence companies to raise their game and manage their businesses more sustainably,” she said.
However, she stressed that whether sustainability meant sacrificing returns and whether focusing on sustainability would mean investors would forego current gains for better future outcomes were divisive issues.
Early studies indicated that the inclusion of ESG factors created slight underperformance, but a growing body of evidence suggests their incorporation can enhance returns from non-ESG portfolios and the right governance would be a key factor.
“The whole of the investment industry needs to rise to this challenge. Increasingly, clients are demanding it — they are under pressure from their members and from industry bodies, as well as from the increasing body of evidence showing that ESG risks are rising and need to be understood and managed better,” Welsh said.
