ESG: The Future of Investing

ESG: The Future of Investing

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.

For more detailed analysis, read Mary Jane McQuillen's full white paper, "The Future of Investing."


IMPORTANT INFORMATION: All investments involve risk, including loss of principal. Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.