Institutional investors and fund managers have failed to embrace environmental, social and governance (ESG) investing as quickly as they should to combat climate change. But the onset of the Covid-19 pandemic offers a chance to better push raise the importance of ESG and sustainability-friendly industries, argue investing practitioners including Mark Konyn, chief investment officer (CIO) of AIA.
Bloomberg Women’s Buyside Network, an informal group which promotes gender equality, hosted a webinar on ESG's role in the coming decade that was made public on Wednesday (May 20). The panellists said that institutional investors and asset managers should use the current Covid-19 crisis to push the importance of ESG investing and emphasise sustainability-friendly industries.
Konyn expressed frustration with the slow progress of ESG-compliant investments among asset owners. He placed the blame for this on institutional investors and fund managers alike.
“We really haven’t made the progress you’d have thought we would have made by this stage in 2020,” he said. “The agenda has been set for a very long time but the staggeringly slow pace we have made as a set of institutional investors awakening public awareness has been disappointing.”
He added that fund managers hadn’t necessarily done the spread of ESG many favours either, often being “focused on business outcomes and so they tend to compartmentalise their approach [to ESG]”.
By this Konyn was referring to the fact that many asset managers will only offer ESG investment products as an option. “For clients who are not interested, things just carry on as they were, and the rationale is that the asset owners should stipulate that they are interested in ESG considerations.
“The time has come to push beyond that because fiduciaries do have a responsibility for their actions and investing capital responsibly that goes beyond basic instructions from asset owners. They need to step up and demonstrate that they consider this is important.”
THE NEW NORMAL
Konyn said the coronavirus pandemic underlined how healthcare crises can spill over into economies and that this offered a “communications and PR opportunity” to promote ideas of sustainability and ESG.
He added that it was a particularly opportune time to do so now given some evidence that some ESG funds are outperforming index benchmarks like the S&P 500.
Virginie Maisonneuve, former CIO of Eastspring Investments, the asset management arm of AIA’s life insurance competitor Prudential, agreed. She predicted, however, that ESG would quickly become mainstream in fund houses.
“The new normal is, I really believe, to have ESG portfolios as standard portfolios. The role of benchmarks and the short-term fear that they will underperform clients’ expectations will have to be worked out and better relationships [created] between clients and the asset managers.”
She added: “To me, in the next 10 years we will see that we do not need to use the term responsible investment; all investments will naturally be responsible and consider E, S and G factors.”
There are signs that this is beginning to take place. BNP Paribas Asset Management announced in September last year that its flagship range of active funds products had been transformed to become 100% sustainable, with ESG integration guidelines applied to all of them. French rival Amundi has said it similarly intends for the inclusion of ESG integration in all its funds by 2021.
Fiona Reynolds, chief executive officer of the United Nations Principles for Responsible Investing (UN PRI), the body largely seen as the standard bearer for ESG standards among investors, argued that governments should consider these factors too, as they spend enormous sums of capital to support economies.
“There is little sense in taxpayers or beneficiaries of pensions, those with money to be invested by large institutions, to be used to bail out brown unsustainable industries only to see them be closed down to meet our commitments to the Paris agreement [in which almost all nations agreed to restrict global warming to two degrees Celsius or less] at some time in the future,” she stated.
It was a point with which Konyn, whose organisation signed up to UN PRI in March 2019, agreed. Indeed, he said that the potential for stranded assets should be uppermost in asset managers’ minds – and should persuade them to shift to ESG principles more quickly.
“If you are left with stranded assets as a simple example… and the assets can no longer attract valuations that they had historically, then you are going to underperform as an asset manager,” he said. “I think we will start to see that over the next several years, much sooner than many expect.”
Maisonneuve believes that investors will realise they have little choice.
“If you look at climate change evolution over the next 10 years, with BAU [business as usual] there will be a 3.5 to four degree [Celsius] temperature rise and the world will be completely unsustainable,” she said. “It’s clear that ESG investing is the only option to allocate capital efficiently to where growth opportunities and sustainability will be.”