The inaugural Big Call: ESG Investors Forum took place at One Moorgate Place on 26 November with topics ranging from the definition of the E, S and G, how investors can do good and achieve excess returns and explaining the construction process of the underlying sustainable indices.
Environment, social and governance (ESG) has been one of the biggest and most topical themes of 2019 as ETF issuers and index providers globally have been launching products with a sustainable tilt. However, with responsible investing still in its infancy, there have been many teething issues which are yet to be resolved.
One significant issue is the definition of ESG which was discussed in the opening panel consisting of Morningstar’s Hortense Bioy, Patrick Thomas of Canaccord Genuity Wealth Management and EFAMA’s Aleksandra Palinska. An argument made by Bioy is how ESG is very broad and believes the term should not have stuck over the likes of other phrases such as ‘ethical’, ‘responsible’ and ‘sustainable’. The overall consensus was there is a growing demand for clarity around definitions but there is a grey area as to who will take the lead.
Throughout the event, there was a reoccurring question on whether ESG investment strategies offer excess returns. The second panel, with AJ Bell’s Matt Brennan, FactorResearch’s Nicolas Rabener and Rafaelle Lennox of Franklin Templeton, discussed the optimal way to construct an ESG tilted strategy with a multifactor overlay.
Research suggests that ESG products do outperform but there are minimal reports incorporating backtesting which support this. Lennox said Franklin Templeton is regularly contacted by companies in emerging markets wanting to know how they can improve their ESG performance, particularly around its governance.
The construction of ESG ETFs is heavily dependent on the underlying indices which were discussed in the third panel with Truvalue’s Thomas Kuh, Andrew Walsh of UBS and Toby Belson of Principles for Responsible Investing.
Issues within constructing the criteria for ESG indices lie in the creation of ‘ESG leader’ products which become very subjective. There are also analyst biasedness issues as two analysts within any given company might have different opinions on how sustainable a stock is.
Europe is leading the charge for sustainable investing but there are just a few funds with a carbon-free filter available in the region. In fact, there is a growing demand for the social side of ESG, according to the final panel.
Nutmeg’s James McManus, Mercer’s Cara Williams and Camilla Ritchie of 7IM discussed who are buying ESG funds, highlighting the point of how there is no one size fits all for green investing as there are ‘different shades of green’, according to McManus. Demand problems have been caused by greenwashing and the lack of transparency as fund issuers are mis-marketing their products to their retail audience.
Finishing off the event with a keynote was EDHEC’s Gianfranco Gianfrate who explained “the good”, “the bad” and “the ugly” within green investing. Gianfrate raised the issue of how there are too many ESG data providers scoring companies that are providing misleading results. For example, one company which was scored highly by data provider MSCI was scored poorly by FTSE and therefore the company could represent itself as sustainable.
While there were issues raised throughout the morning, there is a growing interest in sustainable investing and not just by millennials. Generation X and baby boomers are also incorporating a significant volume of sustainable products within their portfolios as their children are encouraging them to become more ethical within their investments, according to Mercer’s Cara Williams.
A massive thank you goes out to all the speakers and attendees who contributed invaluable insight around a very relevant and important topic within the broad market and ETF landscape. Additionally, thank you to the sponsors who helped make the event such a success.
We look forward to seeing you all at our Big Call: Emerging Markets event on 12 March 2020 at One Moorgate Place.