Active ownership and sustainable investing continue to flourish with growing number of institutional investors integrating ESG risks and opportunities into their investment practices and new sustainable investment products appearing across all asset classes. As the 2018 begins, we are looking at the key trends that are going to shape the industry moving forward.
- New guidelines and recommendations. New directives designed to foster sustainable business practices have been capturing investors’ attention in 2017. One of them was OECD guidance that will help institutional investors implement due diligence recommendations of the OECD Guidelines for Multinational Enterprises to prevent or address environmental and social risks in their investment portfolios. More guidelines are on the way in 2018. Among these, recommendation by the Sustainable Finance High-Level Expert Group, that will form the basis for the EU upcoming Action Plan on Sustainable Finance, might be one of the most game-changing initiatives in the field to date.
- Responsible investment strategies also for passive investors. Thus far, so-called passive investors, who invest in selected stock indices to avoid frequent trading and maximise returns over the long run, were less interested in ESG integration because they found it difficult to avoid controversial companies. However, even a passive investor can be an active shareowner as demonstrated by Vanguard, State Street and BlackRock in 2017. The recent growth in ETFs integrating ESG criteria may also help to promote responsible investing among passive portfolio managers.
- Active ownership growing on all fronts. The rise in the number of shareholder resolutions and investors exercising their voting rights maybe the most visible manifestation of institutional investors commitment to active ownership. But many investors are going even further by proactively engaging (either on its own or through specialised engagement providers) with the management of their investee companies to address the most pressing sustainability issues. The new EU Shareholder Rights Directive that encourages investors to be more active and responsible owners will certainly help this trend to strengthen in the coming years.
- Impact investing and UN’s Social Development Goals (SDGs). According to the Global Impact Investing Network, impact investing is already a USD114 billion sector, as investors increasingly look for opportunities to generate positive social and environmental outcomes alongside a financial return. Adopted by the United Nations 17 Sustainable Development Goals, that cover a broad range of social and economic issues, including poverty, hunger and climate change, unlock further potential for creating positive change through investment decisions.
- Climate change at the top of the agenda. Spurred by the Paris Agreement, global warming has become the number one ESG theme as businesses and investors begun to gauge related risks and opportunities. In 2018 we expect the momentum to continue driven by new investor initiatives as well as Financial Stability Board recommendations on climate related-disclosure, which have been recently integrated into the CDP’s climate change questionnaires.
- New ESG focus areas. “Modern slavery”, gender diversity, pay gap, data security, and tax avoidance are only a few sustainability topics that are expected to come under even closer scrutiny as investor awareness heightens.
- Improved ESG disclosure. Investors have shown a growing appetite for sustainability information and increased transparency. Yet, while sustainability reporting has emerged as a common practice among leading companies worldwide, the quality and scope of disclosed ESG data often fall short of investors’ expectations. Initiatives such as UN’s Sustainable Stock Exchanges (SSE) initiative and EU directive on disclosure of non-financial and diversity information are hoping to bridge that gap.
- More than equities. Sustainable investing historically was associated mainly with one asset class. But this is quickly changing with government bonds and green bonds getting more and more traction. ESG consideration are also part of other investment products, including real estates, infrastructure assets and private equity, though on much smaller scale.