Strategies that embrace environmental, social and governance (ESG) principles are attracting more and more attention and assets -- a trend that's likely to expand going forward.
What's behind the rising interest in ESG strategies -- including ClearBridge Investments' own substantial commitment to integrating ESG into its overall investment process?
Growing evidence that ESG principles have a positive impact on long-term risk-adjusted returns.
People have been investing this way and studying this approach to investing for decades now. There are now numerous studies documenting the long-term performance benefits of investing consistent with ESG principles.
Implementation has evolved toward strategies focusing on positive attributes.
The investment focus of ESG has moved far beyond its origins in the late 1800s, when this approach was primarily about avoiding “sin stocks” in portfolios held by religious organizations. ESG is no longer merely about passive avoidance of companies in industries such as tobacco or firearms. Instead, the emphasis is on finding companies with certain quality attributes – e.g., environmental and product safety, workforce diversity, employee retention and strong corporate governance – that will have a positive impact on future shareholder value.
The number of high-quality ESG investment options is increasing within and across asset classes.
ESG has grown not only in assets under management but also in the number of choices being offered. Consultants and financial advisors tell ClearBridge that there has been an explosion in new ESG-oriented investment offerings – from index to smart beta to quant strategies. There are also a variety of approaches to shareholder engagement. As a result, it is becoming easier to build an entire asset allocation consistent with ESG principles, including public and private equity, fixed income and alternative assets.
Demand is growing.
University endowments are responding to student demands for fossil fuel divestment, and foundations are coming to see ESG as a way to extend their influence on issues that they care about. But now, with an increased focus on climate change and related risks, many institutions are discussing ESG and how they might integrate those factors into their investment portfolios.
People, especially Millennials, want to invest the way they live.
The logic behind this source of demand is blazingly simple. If you strive not to waste water and energy at home, you likely want to invest in companies that are finding new ways to conserve resources. If you boycott the products of known polluters at your local supermarket, you are unlikely to endorse their presence in your portfolio.
Investors are embracing a broader definition of fiduciary duty.
Many of those interviewed by ClearBridge now view fiduciary responsibility with a significantly longer time horizon, as opposed to the standard one-, three- and five-year industry metrics. This new interpretation of fiduciary duty partially reflects a growing understanding of the negative effects of short-termism – the maximize-returns-in-the-short-term-at-any-cost mindset that still prevails in many boardrooms, especially in the U.S.