European money managers are increasingly integrating ESG factors into investment decisions as a way to manage risks and boost performance.
In contrast to thematic strategies that look to invest in companies or sectors focused on environmental, social or governance considerations (such as wind energy or an activist fund), managers are incorporating ESG data into research and security selection across asset classes in mainstream strategies.
European managers say the roots of ESG integration go back a decade or more. However, in recent years, as the quality of data has improved, managers have ratcheted up ESG efforts in response to growing demand from pension funds and consultants.
U.S. managers, on the other hand, are only beginning to look at bringing ESG factors into their investment processes. They are doing so to stay competitive in the European market, observers said, rather than because of domestic client demand (Pensions & Investments, April 5).
Xavier Desmadryl, global head of socially responsible investing research at HSBC Global Asset Management in Paris, said: “ESG problems can translate into major financial problems (for companies),” citing product recalls at Mattel Inc. in 2007 because of lead paint levels in toys sold in the U.S. as a prime example. Mattel agreed to pay $2.3 million in fines as a result of violating the federal lead paint ban, according to the U.S. Consumer Product Safety Commission.
In addition to mainstream financial criteria, “we think it's worth having an additional analytic lens to judge ESG criteria (as a way of) better understanding risk and opportunities of each potential investment,” Mr. Desmadryl said. “If we have a broader perspective, we will do a better job. It's as simple as that.”