ESG is becoming increasingly important for active management

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MMineral investors adopt environmental, social and governance (ESG) principles, prompting active managers to strengthen their credibility on this front.

Actively managed funds are experiencing a kind of renaissance and the sector looking for new frontiers conducive to this management, environmental, social and governance (ESG) investment is emerging as a viable option.

Analysts have also questioned whether an ESG focus leads to better financial results. The US Department of Labor has taken this position and recently proposed a rule to verify pension plan providers that financial gains cannot legally be sacrificed for social or political benefit.

“Not having a solid ESG policy is not yet a deciding factor for most beneficiaries, but it is clearly becoming more important in getting business and winning mandates,” according to a new study from Cerulli Associates.

As sustainable investing gains ground, the debate intensifies between the need for investments to do good or offer better risk management and better performance.

Increase in ESG spending

ESG investments have resonated with investors who are trying to contribute to a better environment, society or workplace. According to data from Deloitte, the percentage of global investors who applied ESG criteria to at least a quarter of their investments rose to 75% in 2019, from 48% in 2017, as reported by CNBC.

The numbers should continue to rise as ESG is just starting to make headway in US markets. Deloitte predicted that U.S. professional investors could allocate 50% of their investments to ESG assets over the next five years.

“Dispatchers assess the ability of asset managers to assess the risks and opportunities associated with material ESG considerations and apply them to sound investment decision making,” notes Cerulli director Michele Giuditta.

Regulators and lawmakers are starting to step up. The European Union will put in place performance thresholds from 2021 and minimum guarantees to help investors and businesses make the transition to a greener economy. Portfolio managers of ESG funds in Europe will need to explain how and to what extent companies are taking sustainable steps.

Active managers touting ESG virtues should show “how the company integrates ESG criteria and provides transparency into active ownership activities – proxy voting, shareholder engagement and resolution activities – to show alignment with the convictions and declared views of the company ”, according to Giuditta de Cerulli.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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