If someone came up to you and shouted, “I support Trump’s decision to back out of the Paris Climate agreement,” you might look at them like they had two heads after seeing the data presented by Bank of America Corporation.
According to their data, ESG investing has grown by more than 97 percent globally in the past 20 years. In a dollar value, the number has gone from tens of billions to hundreds of trillions, and the number of investment funds has increased from 10s to 1000s.
Regardless if a country’s embedded values are socialist or free-market economy, saving money and capitalizing on investment returns should always be top priority, and ESG investing does just that.
When we talk about ESG, we are primarily referring to identifying and reducing risks relating to environment, social issues and corporate governance. But what exactly is ESG investing?
“ESG, or sustainable, investing is relating to the long-term valuation and performance of a company,” says Anders Thorendal, who has been the national Asset Manager for the Church of Sweden since 2005. “That’s where it will make a difference, according to our experience, and if you ask, for example, Robert Eccles, Al Gore, David Blood and other sustainability experts.”
As Treasurer and CIO, Thorendal and his team are responsible for creating and executing fund strategies designed to achieve the Church’s investment objectives, and to oversee external managers on investment and engagement activities.
ESG investment funds will continue to rise, so the need for asset managers will increase as the need to demystify ESG investing increases as well.
“Sustainability is basically about identifying well managed companies that have a long term view,” continues Thorendal, “and where sustainability aspects are part of their business model even though it is not necessarily expressed as sustainability.”
For an investor, the first step of identifying these “well managed companies” is integrating ESG-factors in a financial analysis. An investor should also understand how the asset managers apply ESG factors in their own analysis.
However, “It is not enough to focus on the risk alone,” continues Thorendal, “you also need to identify the opportunities relating to ESG.”
Which begs the next question: why is the integration of ESG important in the valuation of a company?
“Companies that have a sustainability-based approach to their businesses are more profitable over time and deliver better returns to their shareholders,” says Thorendal. “This is the conclusion from Professor Robert Eccles at Harvard.”
The “sustainability-based approach” Thorendal refers to means a company must address and combat all risks associated with its practices. This is where companies who provide ESG integration data will stand out above the rest.
“Having identified and dealt with these risks, the company will not only have acted responsibly towards society by reducing their environmental impact, for example, but also managed risks relating to these ESG areas for the company and its business,” says Thorendal. “These risks, if not properly addressed, can otherwise negatively affect the valuation of the company.
“When evaluating the opportunities that ESG can present, we extend the scope to identify new businesses that address different needs for society. This could be relating to, but is certainly not limited to, the developing countries of the world.”
But how can investors evaluate and compare different asset managers’ approaches to ESG integration? Their best bet is to first identify asset managers who are committed to believing sustainable focus and ESG integration are important for the long-term performance. “Ideally this should be their main and only strategy towards investing,” says Thorendal, “It must be in their DNA!”
Thorendal continues, “For ESG investors, it is important to remember that sustainability means different things for different organizations. As an investor, your values should ideally be fine-tuned or at least reconciled with the asset managers you are reviewing.
“But maybe the most important thing is that the asset manager has the resources and knowledge to understand the macro perspective. That means understanding which businesses and companies will be winners and losers in the ever-changing times we live in.
“It also means which companies will be able to benefit from change by not being too restricted to benchmark sectors when investing, and to be able to invest with a long-term focus.”
Thorendal will be the moderator for the discussion A New Competitive Landscape: Engaging Investors Through the Power of ESG at the ESG Integration Summit at Nasdaq in Stockholm, Sweden on August 29.