David Harrison, manager of the Rathbone Global Sustainability fund, points out the United Nations Sustainable Development Goals are a “useful roadmap for addressing a number of ESG challenges”, including resource efficiency, health and wellbeing, and social inequality.
Under pressure
Is there evidence asset managers are applying enough pressure to companies to address a host of ESG and corporate social responsibility issues?
“Asset managers are stepping up their engagement efforts,” asserts Hortense Bioy, director, passive strategies and sustainability research, manager research at Morningstar.
The price to pay could be high for those companies which fail to act.
“They’re also increasingly willing to name and shame the ESG laggards, especially in Europe. A good example is LGIM,” she says.
“In its Climate Impact Pledge report published in June, LGIM praised the companies that have improved their environmental strategies and shamed those that have shown persistent inaction to address climate risk. LGIM has also divested these companies from its Future World range.”
Joshua Kendall, ESG analyst at Insight Investment, part of BNY Mellon Investment Management, notes: “Today, a significant short-term risk is information security.
“There have been several recent incidents of major cybersecurity breaches and it can be difficult to identify which companies might be most at risk.
“It makes sense for asset managers to encourage companies to provide more information on their cybersecurity practices, engage with them on their preparedness and policies, and to ensure these risks are managed effectively.”
Less volatile?
Given that investing in companies which take their ESG policies seriously should mean they are less likely to be scandal-hit and therefore suffer a sudden drop in share price, does an ESG portfolio dampen drawdowns in a volatile market – more so than a conventional portfolio?
Noelle Cazalis, co-manager of the Rathbone Ethical Bond fund, explains: “Over the longer term, we would like to think that businesses that have strong governance will not be subject to the same degree of litigation and regulatory costs, as well as any losses associated with this.
“Businesses that protect the environment also are likely to benefit in the future for the same reason.
“However, in periods of extreme volatility, we tend to find government bonds can outperform credit risk, given the former are still perceived as safe havens. As a result, a portfolio like ours that can’t invest in government debt, owing to their exposure to armaments and war, might underperform.”
