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Phil Wickenden: ESG investing is about more than being a good citizen

Phil WickendenThe past decade has seen environmental and social governance investing develop from a niche corner of the market to a popular asset class.

But while there is an increased awareness among individuals as to the impact of their actions on the environment, there is much more to ESG investing than being a good citizen.

Asset managers are unveiling new ESG-focused products on a weekly basis, citing the strategies as key drivers of alpha alongside the greater good they can do.

Indeed, the attractiveness of ESG is shifting from purely cultural play to an infrastructural one.

In March, the European Commission launched its Sustainable Finance Action Plan: a strategy to implement a financial system to support the European Union’s aim of cutting greenhouse gas emissions. Here in the UK, the government is seeking to move the economy to one based on low-carbon energy by creating an industry-wide green finance agenda.

However, while fund managers are embracing ESG approaches, there is evidence some advisers have been less positive about recommending them to clients.

When will ESG take off with advisers?

The struggle to reconcile the trade-off between performance and social impact is an oft-cited barrier and critics argue ESG investing can hinder returns because they avoid less ethical companies.

That said, there is evidence to suggest adopting an ESG approach will boost fund performance. At least anecdotally, the impact of environmental and social factors seems to have been negligible to date but there is a growing body of research that shows well-governed companies tend to outperform poorly governed ones by an average of over 30 basis points per month.

This strong link between underperforming companies and poor corporate governance is attracting more attention.

Of course, clarity is needed around the strategy funds are pursuing to avoid “greenwashing” – where companies make claims about their green credentials through marketing rather than actually implementing such business practices.

But there is mounting evidence that a portfolio which includes long-term sustainable companies making good business decisions will successfully serve both environmental and performance targets.

Knowing whether an ESG fund actively excludes certain sectors or specifically picks stocks that offer some sort of net benefit to society, and what technical analysis is being used to determine this, will become an increasingly important part of due diligence for advisers.

Phil Wickenden is managing director of Cicero Research

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