The Need for Automation in ESG Investing
The key to successful ESG investing lies in the finer points of process automation.
Many suspected that the 2019 explosion of interest in ESG investing would wane as soon as the first market calamity struck. The cynics espoused that sustainable investing could only thrive in bull markets and adoption would rapidly recede among investors and wealth managers as soon as market volatility returned.
Then COVID-19 struck.
The appeal of ESG investing has not declined. In fact, a recent poll of wealth managers conducted by market research firm Savanta found that almost nine out of 10 wealth managers believed that the pandemic would actually strengthen the appeal of ESG investing. Some 35% of respondents believed that there would be significant increases while 52% thought there would be marginal gains for ESG.
The fascination among wealth managers is not without substance. The global financial stability report released by the IMF in October 2019 found that the performance of sustainable funds was comparable to that of conventional equity funds, whilst research by Bloomberg showed that many ESG funds are actually outperforming the market.
The integration of ESG into private client portfolios should appeal to all investors – if articulated correctly. Once a wealth manager has established a foundational process for ESG within the firm, it can then build some interesting, highly targeted models and portfolios. Advisors and managers can apply tilts for ESG-mandated portfolios that are very specific, such as focusing on the highest-ranking environmental companies.
Of course, COVID-19 has drawn particular attention to how companies have responded to their major stakeholders – namely clients, shareholders, staff and suppliers. Firms that have put the interests of their balance sheet ahead of their staff have been deeply criticised in the media and this negativity will ultimately filter through to investor sentiment. In this way, social factors within ESG have grown in prominence.
Sustainable investment is about survival for many companies. Have they got the resilience within their organisation in terms of governance structures and stakeholder engagement with shareholders and the workforce to see them through a crisis? This introspection has become mission critical for businesses.