There is much talk these days about responsible investing and environmental, social and governance factors. Like quality and excellence, who could really be against a better society and a more sustainable environment? But while nearly everyone agrees in principle, managers and allocators — and certainly the companies in which they invest — have yet to agree on a common definition of what constitutes an RI/ESG investment approach.
The Chartered Alternative Investment Analyst Association recently surveyed its global member base in conjunction with Zurich-based private equity manager Adveq to see what could be learned about the current thinking on RI/ESG from a population represented by asset owners and money managers in more than 90 different countries. While almost 80% of the respondents saw it as more important than it was just three years ago (and an even higher percentage indicate this importance will grow in the near term), it was clear from the survey there is still much work to be done to build a consensus around RI/ESG as an investment approach.
Most telling was that only 17% of responding asset managers — and an even lower share, 7%, of asset owners — were “very clear about the level of understanding about RI/ESG.” A related corollary about the lack of clear industry standards put an exclamation mark on this point: fully 84% of responding members felt there were no clear industry standards. The absence of what is perceived to be standardized and comparable data, and a greater need for product education, were also noted by the vast majority of the respondents.
The survey results clearly showed the demonstrated interest in RI/ESG, but the noted gaps will continue to be impediments to implementation, particularly as more retail-oriented assets look to move into this area.
The concept of ESG has been around for decades. Specific origins tied to big asset owners could be seen with trade union pension plans in the 1950s interested in better outcomes for health facilities and affordable housing. That was followed by the development of the Sullivan Principles in the 1970s in response to the atrocities occurring under the system of apartheid in South Africa. These developments largely ushered in a period of large asset owners using their capital to influence outcomes mostly by exclusion, via the withdrawal from any enterprise associated with undesirable behavior. It was largely effective and the assets in the global “ESG by exclusion” category are about $15 trillion today, according to the Global Sustainable Investment Alliance. It's an impressive amount, but given a history that goes back nearly 70 years, it is fair to ask why we have not seen greater adoption.