The bottom line: Asset management firms with an eye toward the future are increasingly recognizing the sustainable investing trend, grappling with its complexities, and determining how and where to implement it in portfolios.
4 Drivers of Sustainability
We define sustainability as economic and financial growth that is socially conscious and environmentally aware, supported by inclusive and transparent governance at all levels. Compared with the past, we’re seeing a broad push for sustainability in our economy today, supported by four key growth areas, each of which is accelerating in size and scope. Exhibit 1
Consider a few statistics that illustrate the trend:
- Public Policy: In 2015, all 195 governments of the world signed the Paris Climate Agreement, which seeks to reduce carbon emissions to near zero in the next 50 years.
Practical Implementation Challenges
Despite the growing support for sustainability, practical implementation challenges prevent some investors and advisors from embracing ESG and impact investing in their portfolios. These nuances are integral to the conversation about the role of sustainable investing in the asset management industry today.
1. What to Call It?
Acronyms abound that describe sustainable investing – ESG, SRI, CSR, and RI, among others – and can make it hard for investors to understand and access this space. Discussions of sustainable investing generally refer to one of three categories of approaches:
2. Sifting Through the Data
The last 10 years have seen a surge in environmental, social, and governance data disclosure from corporations. While this growth is a welcome development, the ESG data available today lacks standardization in reporting and methodology. There are currently more than 115 ESG data providers, each with a unique methodology. This rapidly evolving space is likely to mature during the next decade. For now, investors must adopt a proactive approach to find a data set that is replicable and actionable to their approach.
3. Combatting Performance Myths
There is a longstanding debate about whether adopting a sustainable investing approach will cost an investor returns. Recent studies, however, have demonstrated a clear, non-negative relationship between ESG performance and corporate financial performance. In fact, a March 2018 study from UN PRI and MSCI shows that portfolios optimized around ESG momentum (i.e., an improvement in ESG scores) and ESG tilt (i.e., a best-in-class approach) would have led to 18% and 10%, respectively, of cumulative outperformance in the 10-year period ending June 2017. Exhibit 2
4. A Growth Opportunity
Roughly $8.7 trillion – or 21% of all managed assets in the United States – has some element of ESG consideration as part of the process, an amount that tripled between 2012 and 2016.4 In comparison with Europe, where more than 50% of all managed assets have a sustainable investing element, the United States has significant room for growth.
Institutional investors have largely driven the growth in sustainable investing to date, but individual investors – particularly Millennials and women – are becoming more attuned to the availability and potential benefits of these investment approaches. This represents an opportunity for financial advisors with an understanding of the space to provide guidance to clients looking to align their portfolios more closely with their values.
Read the white paper, Drivers and Detours on the Road to a Sustainable Future, for more on the growth and nuances of sustainable investing.
OppenheimerFunds is not undertaking to provide impartial investment advice or to provide advice in a fiduciary capacity.
ESG practices may underperform the market as a whole.