November 13, 2017

Monday Morning Memo: Will ESG investing become the new normal?

by Detlef Glow

Even though there is a lot of talk in Europe around sustainable investments, also known as using ESG (environmental/social/governance) criteria, it seems the majority of investors still do not invest in sustainable products. In this regard one needs to question why European investors are so reluctant to use sustainable investments. I was really surprised that the latest research shows that some investors still believe the inclusion of ESG criteria leads to lower portfolio performance. But even more surprising was the finding that professional investors also do not integrate ESG criteria or use such a specific approach in their portfolio management processes, since they feel they don’t understand the differences between the diverging approaches.

Generally speaking, it is a good sign that investors increasingly want to invest in funds/portfolios that take nonfinancial criteria into account. In this regard, I strongly believe that the European fund industry will develop investment processes that focus on ESG criteria alongside well-established financial data and will use ESG criteria to minimize nonfinancial risks, such as reputation risk, in their portfolios. This becomes even more important as we find out that risks that could have been identified with nonfinancial criteria, such as the governance risk at Volkswagen, led at some point to massive losses in the portfolio. Is the integration of nonfinancial criteria in the portfolio management process a fiduciary duty? I strongly believe that the new generation of portfolio managers will drive the integration of these criteria, since these portfolio managers are well trained in interpreting sustainability reports and evaluating corporate governance structures. This means that at some point in time sustainable investment using ESG criteria will be the new normal.

The views expressed are the views of the author, not necessarily those of Thomson Reuters.

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