With interest in sustainable investing among fund managers on the rise worldwide, it’s no surprise that Environmental Social Governance (ESG) as opposed to Socially Responsible Investing (SRI) criteria is gaining in prominence with individual investors.
“As analysts, we have been focused on short-term earnings and meeting expectations, but we are realizing that there are advantages to focusing on longer-term sustainability returns,” said Jessica Ground, Schroders global head of stewardship, who was among panelists who lectured as part of a press breakfast Tuesday at the Palace Hotel in Manhattan.
For one thing, millennials are among the most active investors in ESG trends. Some 93 percent compared with only 68 percent of Gen Xers and 51 percent of baby boomers believe that social or environmental impact is important when making investment decisions, according to the 2014 U.S. Trust Insights on Wealth and Worth survey.
“Millennials are very interested in the ESG area, and in particular, how a company behaves,” Ground told Financial Advisor. “They are interested in a company’s record with human rights, for example, whereas previous generations may have been concerned with tobacco.”
Among the international companies that demonstrate a commitment to ESG is the chocolate company Nestle, which makes up 3.3 percent of the Hartford Schroders International Stock Fund and has a fundamental risk score of 3.2.
“Nestle has low cyclicality in terms of revenues and margins,” said James Gautrey, chartered financial analyst and portfolio manager with Schroders. “On the ESG side, it has a good reputation in terms of how it deals with its employees.”
BASF, a European chemical company, has a fundamental risk score of 5.2 and makes up 1.9 of the fund.
“There are higher levels of risk involved with BASF because it carries debt, but the reward side is good,” said Gautrey. “We see good upside and that’s why the position size is slightly higher.”
Although Danone experienced consumer backlash over one of its high sugar yogurt products, Hartford Schroders International Stock Fund is 2.1 weighted in the stock.
“The management has changed its focus,” said Gautrey. “They changed the yogurt and are about to re-launch it and it’s more health focused, so we are optimistic about future performance.”
At Schroders, ESG engagements have increased from less than 100 in 2008 to nearly 500 last year over 33 countries globally, according to Schroders data.
“We care about ESG on our team because we think the market consistently underestimates companies that can earn high returns and excessive cost of capital over the long term,” Gautrey said. “Management teams that ignore some of these issues could run into quite serious changes in their business model in five years time if carbon taxing, for example, is widely implemented.”
Carbon tax, a levy on the carbon content of fuels, falls under the environmental category of ESG along with climate change, while human rights, health and safety are categorized under social. Governance typically involves issues such as board structure and business integrity.
“The advantage we can have through our ESG analysis is understanding how business models will change within industries and who will be the winners and losers,” Ground said.
Impact investing only accounts for 21 percent of ESG approaches, according to a CFA Institute study called "ESG Issues in Investing." Integration in investment analysis and decision ranked the highest at 57 percent followed by exclusionary screening at 36 percent and thematic investing at 23 percent.
“The sustainability angle is what’s directly linked into the ESG analysis where if we are going to be right in identifying companies that have a sustainable edge of five to 10 years, this analysis improves our confidence in this process,” Gautrey said.