Awareness among institutional investors of Environmental, Social and Governance investing (ESG), also referred to as Socially Responsible Investments (SRI), has accelerated over the past 12 months. Data from Clear Path Analysis reveals that 75% of those following SRI principles see value in considerations such as managing reputation and country risk – specifically within frontier markets.
With this increased demand, 82% of fund managers now believe that ESG issues are an important consideration when choosing new investments, however 43% remain unclear about the links between ESG and profits in the short to medium term. This is despite evidence from Allianz Global Investors which indicates that this type of investing can provide returns of up to 1.6% over traditional equities.
Commenting on the growing trend towards ESG investment, Dominic Scriven CEO at Dragon Capital, said: “Rapid economic growth, maturing capital markets, evolving political and regulatory frameworks and youthful demographics have understandably attracted increasing attention from global institutional investors keen to deploy funds in promising frontier markets.”
“In the past, many of these investors have found the lack of corporate transparency, poor governance practices and erratic enforcement of regulation delivered risk too great, and as such have delayed investing until now that is”. In addition: “There has been clear upsurge in corporate SRI awareness as many companies have realised it is an essential requirement to maintain a positive company profile.”
Wolfgang Pinner, Head of Sustainable Investments at Erste Asset Management, writes about increased investor awareness and the benefits of the SRI approach: “Investment managers sometimes believe, wrongly, that ESG investing is merely just another top-down, board driven set of constraints and can offer no intrinsic value to their investment approach. This is simply not the case.”
“This kind of approach is geared to benefit investment portfolios in most asset classes. Adding this new dimension to the investment process can help investors stay clear of risks often neglected by traditional investment styles.” He continues: “Investors long for higher transparency standards and, thanks to its extended view of risk, an SRI investment approach can help to achieve this.”
Pinner adds: “The Fukushima nuclear accident is the most recent example of a situation where a thorough ESG approach could have helped investors avoid risky companies. Furthermore, it would also have helped investors steer clear of Greek bonds due to the poor track record of governance displayed by the Greek Finance Ministry. This kind of responsible approach can help investors and fiduciary managers protect their reputation.”
“Responsible investing is not reserved for an elite of tree hugging philanthropists. It proceeds from a sound investment process, is geared to generate performance and it enhances the opportunities available to investment managers. ESG investing should be regarded as a risk-adjusted alternative to traditional alpha generation. I believe that the flow of money towards SRI funds is not about to stop.”
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