Responsible investment doesn’t have to mean sacrificing returns

20th October 2014 by Catherine Howarth

Recent research published by Hermes Investment Management gives encouragement to those who would like to see Responsible Investment issues at the heart of the debate about looking after the long-term interests of savers, but we need to get beyond a perception that engaging on environmental, social and governance issues means sacrificing investment returns. We also need to move beyond the idea that raising ESG concerns automatically makes one a placard-waving hippie whose naïve opinions on financial matters shouldn’t be respected or given credence in the marketplace.

First, the good news: Over two thirds of institutional investors surveyed by Hermes said they believe pension schemes will reject investment opportunities over the next five years on the basis of unacceptable ESG risk.

As more and more people begin to realise the potential that their investments have to secure a future for the planet, companies like Hermes clearly see an emerging opportunity both in the institutional and retail/wealth management space for sound thought leadership on Responsible Investment issues, but it’s concerning that even major European pension fund managers still appear to be conflating ethical considerations with ESG integration. In a recent survey published by Investment and Pensions Europe of 35 European pension boards, one pension fund manager said that ESG concerns are for “do-gooders…living in fairly land”.

ShareAction’s research and experience over recent years has highlighted divisions between those investment professionals who see ESG as essential to delivering long-term returns, and those with a shorter-term outlook, including those who would rather not be bother thinking too much about the importance of these wider issues. After all, adding robust ESG analysis to narrow financial analysis of companies does involve more effort.

It’s reassuring to note that a majority of those surveyed by Hermes, 55%, think that companies which focus on managing ESG issues, particularly corporate governance, produce better long term returns for investors. What’s concerning about the findings of the IPE survey is that many of the pension funds surveyed are likely to be signatories to the UN Principles of Responsible Investment, which works hard to clarify these issues.

Of course, we’re pleased to see leading investment management firms such as Hermes doing research on these issues and placing them at the heart of the Responsible Investment debate. It would just be nice to shift the European pension industry’s focus a little further given the apparently widespread uncertainty about the value of ESG.

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