Great Expectations for ESG — Takeaways from PNB Paribas report
This report just out from BNP Paribas, the large French bank, is based on a global survey of 461 asset owners and asset managers and in-depth interviews conducted in early 2017. Some of its key findings relevant to U.S. advisors and wealth managers:
Investors are increasingly concerned about climate change and the transition to a low-carbon economy. When asked what component of ESG they believe has the greatest potential influence on returns, professional investors in the past have usually said G — corporate governance. In this survey, 42% of respondents said environmental factors (28% said social, and 30% said governance). This reflects increasing concern about how companies are dealing with the risks and opportunities associated with climate change and the impact on financial performance. The report notes that asset owners, as long-term investors, also “are increasingly concerned about the financial risks of ‘stranded assets’ — notably fossil fuel reserves — in a low-carbon economic future.”
What this means for advisors: More fund managers paying closer attention to climate risk.
Investors are increasingly interested in green and sustainable bonds. The survey found that more than half of investors who have sustainable investments as part of their portfolios are using green and sustainable bonds. Green bonds have a specific environmental or climate risk mitigation purpose. Sustainable bonds advance priorities set out in the UN’s Sustainable Development Goals, such as gender equality and healthcare infrastructure.
What this means for advisors: Greater institutional demand for green and sustainable bonds will spur additional issuance of these attractive “impact” investments, making it easier to find them in fixed-income funds.
ESG incorporation and sustainability themes are the most widely used approaches. It can be confusing to sort out the various investment approaches that fall under the broad rubric of ESG or sustainable investing.
In this survey, investing based on company ESG profiles was the most commonly used approach, cited by 57% of respondents. This refers to strategies, mostly public equity, using company ESG ratings, scores, or qualitative profiles as part of the investment process.
Close behind was the use of strategies involving “green bonds, sustainable bonds, or thematic funds.” These investments, generally, comprise what is meant by “impact investing.”
What about negative screening? Not so much anymore. Only a third of respondents said they used it.
What this means for advisors: Sustainable investing is not any longer about negative screening. It is about identifying companies through ESG analysis that are more likely to make a successful transition to a low-carbon economy and about having an impact by investing thematically in sustainability.
ESG analysis is expected to grow in fixed income and emerging markets. These were the top asset classes, along with private equity, where survey respondents said they were planning to increase their ESG exposure over the next two years.
What this means for advisors: Expect more fund choices in these areas. ESG analysis seems especially promising as a way to give investors an edge in emerging markets.
