By Stefan Van Geyt, Group Chief Investment Officer at KBL European Private Bankers.
Responsible investing has a long history, dating back to at least the 18th century, when English Quakers refused to invest in slave-trading companies.
Far more recently, in 2006, the United Nations and a small group of institutional investors launched the Principles for Responsible Investment (PRI), accelerating a movement that currently includes over 2,000 global signatories. Collectively, those investors and asset owners represent more than $82 trillion in assets owned or under management.
The PRI is not prescriptive – you do not have to exclude specific companies or investments, for example – which is part of the reason it has gained such a wide following. Indeed, the PRI recognizes that “responsible investment” means different things to different people. Such strategies also come under different names: responsible, sustainable, socially responsible, impact and so on.
A broadly accepted distinction is often made between an investment strategy that’s strongly driven by specific values – such as the exclusion of tobacco, alcohol or weapons – and one that takes fewer, if any, absolute positions but still seeks to take into account relevant environmental, social and governance (ESG) factors.
Consider the pacifist Quakers, who refused to invest in slavery three centuries ago. Today, they do not invest in companies that manufacture weapons. Such a strategy – where values play an absolute role in investment decisions – is typically called “sustainable” or “socially responsible,” while the broader incorporation of ESG factors is known as “responsible.”
But, you may ask, will a responsible strategy limit my investment universe and lead to lower returns? That’s a legitimate concern, but the simple answer is no.
Industry research shows that the top 20% of ESG companies have consistently outperformed the market. Indeed, investors are constantly seeking to limit their investment universe by excluding poorly run or excessively risky companies. Considering ESG issues – the key element of responsible investing – is an attempt to evaluate and avoid risk from factors not always associated with investment decisions in the past.
Judging the fair price of a share, given its potential return, continues to be as difficult as ever. But responsible investing adds fresh perspective to that assessment, adding ESG risks into the mix.
A company with significant holdings in coal, or a coal-fired energy producer, runs a high risk if a carbon tax is introduced. And a company that ignores questions about child slave labor in cacao production runs an equally clear reputational risk.
These factors are increasingly important in investment decision-making, although low ESG risks alone do not guarantee a sound investment.
The world is changing ever more rapidly, and investors are taking a fresh look at some previous practices. Not doing so would be irresponsible.
Publié le 05 février 2019