Taking the plunge

The key to successful ESG is knowing what you want. Global investors are in drastically different stages when it comes to responsible investing. Some are well on their way with their ESG efforts, others have just begun;some are sceptic of the whole issue, and others have high conviction. There is still a large number of investors wondering how to get started. What are the things that keep investors from taking the plunge?


Why should I do ESG?

Why are so many investors still waiting? The reasons are various: some doubt ESG can improve performance while others doubt it has any impact at all, and some are wary of more complicated investment processes and higher investment management fees. Extra-financial ESG issues are difficult to incorporate into financial performance and research is often inconclusive.

The terminology as well as the plethora of methods can be confusing to a beginner. The first step in ESG is to make sense of the terms and understand the spectrum of responsible investing.

Knowing and understanding the words isn’t enough. Setting appropriate goals and choosing the right strategy are what truly counts.

How to set goals for ESG?

For some, the drivers for responsible investments may be ideological. For the majority, however, performance is the top priority. The key to succeeding with ESG is to know what you want as an investor: What is the objective and what are the needs of your institution? Are you in it for the alpha in performance or are there other aspirations that outweigh the quest for performance?

There is a huge number of issues in ESG, and they tend to be ambiguous. Instead of thinking in black and white terms, it’s beneficial to think of ESG as a spectrum. You should focus on the big picture.

An important part of setting goals is to understand how the needs and wants are reflected in the way the investments are made, and what kind of follow-up reporting to demand. If the objective is performance, integrating ESG to all investing can be a smart strategy. Exclusions may just make you feel good but don’t do good. If you really are into changing the world, you have to engage strongly. Changing the world is not easy.

ESG – the new normal

To draw an analogy, let’s travel back to the dawn of personal computers. When they were first introduced, some jumped aboard immediately, but many were intimidated. What on earth is Windows? How do I copy and paste? Where do all the ones and zeros go? Some even argued that they will never have any use for such an apparatus.

Thirty years later, we can’t imagine our lives without our Excel sheets, systems and applications and websites. They are integral to our everyday work and life. The same will happen with ESG. Soon, we will look back and think in amusement of the time we didn’t make investments in a responsible way.

We believe that ESG is becoming the new normal. Even though there are no cookie-cutter models and the methods for comparing different industries are far from perfect, we think it’s better to act now than to wait. The more we take ESG factors into account in all investments and the more we demand accountability from companies, the simpler the rules of the game will be.

 

Text: Tomas Hildebrandt

Tomas Hildebrandt is a senior portfolio manager for institutional clients. He is a member of Evli’s asset allocation team and is also working as a market strategist. Tomas joined Evli in 1996 and has been working in capital markets for nearly 30 years.

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There are confusions, there are uncertainties but ESG is the new reality. It would be great if the industry finds standardisation that takes into consideration all angles and viewpoints before making things mandatory.

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