The “Sustainability” became a cumulative expression for economic prosperity, progress and principle of Global Wealth Management for long-term investments. This evoked change in the investment approach considers also non-financial risks, involving them into financial decisions of assets allocation.
Namely, ESG (containing in total more than 400 Environmental, Social and Governance metrics) became very important Wealth Managers’ instrument that takes account of general aspects directly related to the financial markets. ESG strengthening was marked when the United Nations in 2006 aiming to improve the sustainability of the worldwide financial system in a long-term, incorporated ESG within the “Principles for Responsible Investment”. In 2015 all UN Member States adopted the 2030 Agenda for Sustainable Development with 17 crucial goals (DSDG UN). The term “Sustainable investment” (SI) started to be associated with responding to the environment, society and own corporate governance.
EU assuming the evolvement of sustainable finance (SF), especially over the last 5 years, transformed its purpose into “Building the world’s most sustainable financial system”, shifting into SF with long-term impact, taking actions to integrate ESG factors into policies, regulations and financial markets’ services (EC, 2018). The accent is on sustainable technologies, innovations, value creation, etc. The taken efforts are towards setting EU taxonomy for sustainable activities and requirements for green financial products; clarification of the asset managers’ duties for incorporating sustainability and ESG into investment decisions, advisory process and risk management; sustainability risks integration in the internal processes, systems and controls; better transparency whether credit rating action is driven by ESG factors; better transparency about companies’ ESG policies, ESG involvement in the prudential regulations for bank and insurance sector (MiFID, UCITS and AIFMD).
According to the Global Sustainable Investment Review (GSIA, 2019), since 2012 the Global sustainable investment market (GSIM) that incorporates 5 major markets – Europe, US, Canada, Japan, Australia and New Zealand, keep growing and in 2018 reached $30.7 trillion SI assets. The three leaders in SI are Europe, US and Japan markets. For the period 2012-2014, the fastest-growing markets have been the US, followed by Canada and Europe but since 2014 a shift in the performance has made Japan as a leader and the coming behind Australia/New Zealand and Canada.
The decisions for SI have been taken following seven strategies/activities as globally the preferred one is the negative/exclusionary screening with the highest amount of SI assets ($19.8 tr.) and favourite in, followed by the ESG integration strategy ($17.5 tr.), most liked in US, Europe and Canada Australia/New Zealand, Corporate engagement and shareholder action ($9.8 tr.) favourite in Japan, Norms-based screening ($4.7 tr.), positive screening ($1.8 tr.), Sustainability themed investing ($ 1.0 tr.) and Impact investing only ($0.4 tr).
Although the various approaches for portfolio composition, they are based on separate E-S-G criteria or on the overall one. The growing of total global amount in SI assets proves that decision-makers started to trust that incorporating ESG in the investing can bring benefits – positive financial return together with mitigated risk. Investors look at also adopting strategies such as Classic Investing, without ESG factors, Restriction-list based, Integration Investing or Impact investing that combine ESG tenet with existing methods of identifying attractive investment opportunities.
The individual financial markets adopt individual strategies due to sensitiveness of ESG to companies’ profiles, economic sectors and regions features. However, the scope is only one: maximizing the profit and wealth of clients. It is worthy to be underlined that, from empirical results, portfolio using ESG scores is less sensible and less affected from the volatility of markets, keeping returns comparable with portfolios composed by no ESG approach. This is an important characteristic that allows portfolio with ESG factors to be compliant with long term investment strategies. It has been proven that there is a correlation between ESG and companies’ financial performance, it is not linear and to describe it, one needs to invoke models with increasing complexity.
For the sake of the clarity, there are economic sectors’ whose profit is not affected by ESG or E-S-G investments and even worse, they could deteriorate it. ESG is a compound of the three non-financial risks that are compensated inside its overall score. Due to the increased availability of ESG data and computing power, the investment community increasingly adopts many quantitative approaches to maximise the profit and mitigate the risk. One can state that ESG represents the present and the coming future of Wealth Management.
Mario Dell’Era – PhD, Quantitative Market Risk Sr. Manager | Citigroup
Anita Rahova – Project Portfolio Financier | Agrinatura EEIG