Monday, March 11, 2013

Responsible Investing Incorporating ESG Factors

Environmental, social and governance (ESG) factors are now included in mainstream corporate stock and bond analysis in numerous investment firms, funds and managers. The reason ESG factors are now being recognized by investors is because they provide analysts with better insight into companies and the possibility of producing higher investment returns with less risk. ESG issues are now becoming a significant factor in all asset classes. Investments that pay heed to environmental and social factors can be very lucrative. Responsible investing offers an unparalleled opportunity as the world increasingly comes to grips with the harsh realities of the destructive nature of the old economy.
Responsible investing, also known as impact investing, consists of investment choices that offer social and environmental benefits. The new emerging economy, including Renewable energy sources and battery technology require elements like gallium, indium, germanium and lithium. This makes those companies which mine the key components of the new green economy a very good investment.
Responsible investment is about far more than ensuring that a company is contributing to the green economy. To be truly sustainable there must also be a dimension of social responsibility that includes far ranging factors including everything from fair wages to ensuring there is no child labor involved.

Responsible investment requires investors and companies to take a wider view, longer term view that acknowledges the full spectrum of risks and opportunities facing them. This approach enables them to allocate capital in a manner that is aligned with the interests of their clients, the environment and people.

As explained by PRI:
"Responsible investment is an approach to investment that explicitly acknowledges the relevance to the investor of environmental, social and governance (ESG) factors, and of the long-term health and stability of the market as a whole. It recognises that the generation of long-term sustainable returns is dependent on stable, well-functioning and well governed social, environmental and economic systems. Responsible investment can be differentiated from conventional approaches to investment in two ways. The first is that timeframes are important; the goal is the creation of sustainable, long-term investment returns not just short-term returns. The second is that responsible investment requires that investors pay attention to the wider contextual factors, including the stability and health of economic and environmental systems and the evolving values and expectations of the societies of which they are part. Looking to the future, these issues will be increasingly key."

In a 2010 PRI press release, Executive Director James Gifford said, “every large, world-class listed company is now monitoring and reporting on its ESG performance, and so too are an increasing number of investors.” The PRI reported that, “total [PRI] signatory numbers… has jumped in the last year by more than 30 per cent… The value of the assets under management of PRI signatories now stands at $22 trillion, over 10 per cent of the estimated total value of global capital markets…”

A March 2009 study by risklab, (a division of Allianz Global Investors) was the first systematic quantitative analysis. The results of this landmark study strengthened the position of ESG advocates and revealed that a focus on ESG factors can significantly reduce portfolio risk or enhance returns.

Another study found that, “… [ESG] improves portfolio diversification through a reduction of the average stock’s specific risk …ESG criteria probably leads best-in-class ESG screened funds to be better diversified than otherwise identical conventional funds".

And a third study also by risklab, reported in found that ESG can reduce the risk of negative or ‘tail’ risk impacts on portfolios in emerging as well as developed markets."

Countries are taking big steps in promoting ESG issues in corporate reports and stock exchanges are becoming proactive on ESG issues concerning their listed companies. We now see that ESG stock and bond indexes are becoming commonplace everywhere.

There are a wide range of ESG investments and investors now understand the extraordinary potential of incorporating ESG into their investment analysis.

For more information see the United Nations’ Principles for Responsible Investment.

© 2013, Richard Matthews. All rights reserved.

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