While the adoption of sustainable investing accelerates, variability in definition standards and data gaps within the environmental, social and governance (ESG) eco-system remain prominent, according to Julie Moret, head of ESG at Franklin Templeton.
Speaking to ETF Stream, Moret (pictured right) believes there are four drivers for maintaining ESG demand, including growing the relevancy of sustainability challenges such as climate transition impacts, resource efficiency and scarcity.
Secondly, reacting to the shift in demographics as the population grows and begins the largest transfer of wealth between generations. The population is expected to reach 10 billion by 2050 which will put significant pressure on resources and will require more sustainable practices.
Additionally, the transfer of wealth to millennials has seen a change in client preferences as the generation coming through are far more conscious of the future.
Thirdly, there are growing policy pressures in incorporating ESG such as the European Union releasing a sustainable action plan which is hardwiring sustainability into capital markets and investor duties.
Finally, there has been an increase in stakeholder pressure on companies to make the change to more sustainable business plans and strategies.
Rafaelle Lennox, senior ETF specialist at Franklin Templeton, told ETF Stream there has been significant growth within the ESG ETF industry.
Lennox (pictured left) said: “Regulators are wanting asset managers to launch more of these sustainable products, particularly on the environmental side to help fund the transition to a low carbon economy, and promoters are looking to launch sustainable solutions for their growing client demand.”
There is still room for more growth in terms of assets and products available as it is not a one size fits all. Lennox, who is speaking at ETF Stream’s Big Call: ESG Investors forum, commented on how every investor will likely ask for a different method such as a focus towards climate change or reduced risk exposure or avoiding controversial companies.
However, as the attention towards the application of sustainable strategies is a positive development, the application still has teething problems, according to Moret. Two factors which hinder the growth of ESG adoption are variability in global definition and data gaps.
Moret said the industry is rife with acronyms making it like a bowl of “alphabet soup”. It is believed a global definition standard would create more sustainable activity.
Within the EMEA region, sustainable investors are more associated with corporate governance whereas in the US, investors are more associated with values-based investing.
Furthermore, there is a lack of disclosure from issuers to investors, creating gaps within data. Franklin Templeton is actively supporting and encouraging corporates to disclose financial material on ESG matters, informed by materiality frameworks such as the Sustainability Accounting Standard Board.
Moret and Lennox highlight how Franklin Templeton’s passive strategies complement the active strategies where there is much greater levels of engagement with companies.
Indices can be constructed with the help of artificial intelligence and big data and analysts can also use this data to get a better understanding of how each company scores for each the E, the S and the G.
This shows the level of ESG risk each company offers and the firm actively engages to further assess and ultimately improve a company’s ESG credentials.
For investors, Franklin Templeton does not believe they have to compromise on performance to gain exposure to sustainable strategies.
“We do not see incorporating ESG analysis and understanding the impact on valuations as being a different objective to striving to generate sustained long-term risk-adjusted returns,” said Moret. “We see it purely as part of fiduciary duty.”
According to Morningstar, assets within sustainable ETFs is roughly $27bn after year-to-date flows of $12.5bn at October’s end. Despite there still being unresolved issues within ESG, Lennox expects these figures to continue growing in the future.