Somehow, even with the dramatic uptick in adoption of sustainable investment practices, the idea of investing in a conscious and purposeful way is still taboo. In the process of working to gain more mainstream acceptance of ESG-focused practices asset managers shifted away from the idea of aligning portfolios to individual or institutional values or missions and rather emphasized an investment-first, or in many cases investment-only approach to ESG. I have even sat through manager presentations where it was stated not just definitively but assertively that what was being shown was strictly about investing and without concern for issue avoidance or positive change for anything other than economic reasons.
What got forgotten is what motivates investors, again both individual and institutional, to want to invest in this way in the first place. The reality is that the economic case for ESG investing as a “style” is easy to make conceptually and very hard to demonstrate quantitatively. We can intuit that ESG addresses on- and off-balance sheet risk, focuses on investments with a more fundamental long term thesis, and can serve as a proxy for quality. As I and others have written exhaustively the research clearly seems to indicate that there is no penalty for incorporating ESG into an investment process, but discernible and systematic Alpha is something else entirely. Capital markets are reasonably efficient, and if the Alpha case was that definitive EVERYBODY would pile on that trade.
In this month’s Citywire USA Pro Buyer (Issue 52) magazine, I write to remind consultants and advisors, and asset managers too, that most of the interest in ESG is coming from the asset owners, and is rooted in values- or mission-driven motives. The trends we are seeing are around consumer behavior, demographic changes, and heightened social and environmental awareness. The investment case definitely reinforces the conversation around ESG, but for the primary purpose of making it ok to have the discussion about issue avoidance and positive change. It is a question of intimacy — investors are bringing something deeply meaningful and personal into the room and they are being responded to in a sterile, almost clinical way. Warm up the conversation. Show empathy. LISTEN.