The popularity of ESG investing is making due diligence increasingly important.
Whether investors use ESG as a risk-management tool, a driver of investment performance or a reflection of their beliefs, this now mainstream investment approach has invited oversight and regulation.
Many countries have introduced ESG regulations and codes requiring corporations and institutional investors to take account of ESG issues in their investment decision-making while the United States has lagged behind. Yet increased oversight and regulation seeks to establish standards, a benefit for investors when pursuing a better risk/return profile.
In the U.K., regulators instituted disclosure of the gender pay gap, while the current stewardship code actively encourages engagement. Australia passed the Modern Slavery Act, calling for companies to take action on modern slavery risks in the operations and supply chain, while the European Commission proposes that advisors ask clients directly about their sustainability preferences.
In Europe, total assets committed to ESG strategies grew by 11% to $14.1 trillion in the two-year period ending in 2018, but their share declined from 53% to 49% of total professionally managed assets. The drop may be due to a move to stricter ESG regulations and definitions.1
In the U.S., institutional investors and academics have petitioned U.S. regulators to require standardized disclosures of corporate ESG factors, a move that would bring U.S. rules up-to-date with those in other regions.
Both the investment outcomes achieved and the processes followed are critical for evaluating whether or not an institutional manager has delivered on its fiduciary duties.
The U.S. Department of Labor (DoL) has a longstanding view that “because every investment necessarily causes a plan to forgo other investment opportunities, plan fiduciaries are not permitted to sacrifice investment return or take on additional investment risk as a means of using plan investments to promote collateral social policy goals.”
Additionally, the White House recently directed the DoL to review whether pension plan managers embracing ESG investment strategies are compromising their fiduciary duty to maximize returns when engaging with energy companies.
This stance by the U.S. government and financial regulators has undoubtedly led to slower uptake of ESG investment principles compared to Europe. Yet total U.S. assets under management using ESG approaches grew to $12 trillion by 2018, an increase of 38% compared to 2016, according to the Global Sustainable Investment Alliance.
Sustainable Initiatives
The UN Sustainable Development Goals, the UN Global Compact, and the OECD Guidelines for Multinational Enterprises serve as high-level frameworks for responsible investing strategies. Companies worldwide have become members or public supporters of more than a dozen sustainability initiatives by reporting their sustainability performance.
ESG investing has its supporters and detractors. Nonetheless, the growth of sustainability initiatives, oversight and regulation worldwide, and the marked increase in ESG assets globally attest to the desire to do good while doing well.
To learn more about ESG investing and identify emerging regulations, download our no-nonsense primer on ESG investing: Invest in the ABCs of ESG.
1 Global Sustainable Investment Review.
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