22.
ESG models make progress
The concepts of ESG, sustainable investing, and responsible investing have developed into a spectrum of sustainability models that are currently practiced as an adjunct to the investment model. Future practice becomes more mainstream and standardized. ESG is also complementary to long-horizon investing and system-wide thinking. E, S, and G naturally evolve into individual unbundled investment factors.
KEY POINTS
- In the Purposeful Capitalism scenario, there are trends supporting fresh impetus in the areas of responsible and sustainable investing. The driving forces for new models are complex. Investment decisions involve many moving elements to manage across short-term and long-term horizons, with balances to be struck in this mix. System-wide thinking is used. Think of examples in which consumer trends reflecting social change are moderated by regulatory factors reflecting increasingly populist political systems.
- In investment analysis, the emerging challenge is understanding a fast-changing business landscape with many VUCA (volatile, uncertain, complex, and ambiguous) characteristics. The increasing impacts of technology will emerge in multiple fields: for instance, genetics, nano-technology, robotics, energy, communications, and transport all are set for transformational changes. Sustainability in investing should be seen in this context as wider than ESG in encompassing the broad concept of optimizing long-term value while recognizing increasing uncertainty.
- The sustainability spectrum that will evolve in the next 5–10 years is split roughly three ways:
- ESG is lightly integrated.
- ESG and stewardship are broadly mainstreamed.
- ESG, stewardship, and impacts are tightly managed.
- Each of these models corresponds to different convictions and intentions. The convictions reflect beliefs in the materiality and relative pricing of ESG considerations. In a world where business is increasingly made up of intangible assets, pure financial factors are less likely to correlate with long-term value.
- The intentions reflect asset owners’ goals. The asset owners of tomorrow increasingly volunteer for, or are pressured into, wider responsibility for their investment footprint, and the two dimensions of returns and risk are joined by a third dimension: accounting for impacts.
- ESG will progress most helpfully as data become more accurate and as standards of use evolve, with regulators and standard-setters playing an important role. Data naturally will be specific to each of the three parts of E, S, and G, and thinking will increasingly differentiate between them while recognizing their connections.
- Universal ownership is increasingly practiced by a few large, long-term funds and managers taking a system-level position and acting in line with the mantra: “We invest recognizing two interdependencies: The returns we need only come from a system that works; the income we generate is worth more in a world worth living in.”
- Input from CFA Institute members shows that sustainability in investing is currently being adopted but will take time to reach critical mass. Only 16% of survey respondents say their firm’s current commitment to the research of ESG and sustainability issues is high; those serving institutional clients are slightly more likely to say this than those serving a private wealth investor base (18% versus 13%, respectively).
- One-fifth of members expect their firm’s commitment to the research of ESG and sustainability issues to be significantly higher in the next 5–10 years, and 52% expect it to be slightly higher.