Funding & Investing

Short term investments, long term thinking – how ESG positively impacts value

Published: Jan 2020

Liquidity, yield and capital preservation may have been the only watchwords for investors in money market funds and ultra-short duration bond funds, but times are changing. We now need to understand the positive impact that environmental, social and corporate governance (ESG) factors can have on investment outcomes.

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Marte Borhaug

Global Head of ESG Investment Solutions, Global Responsible Investment

Senior Portfolio Manager – Liquidity Funds

In a recent webinar, Marte Borhaug and Demi Angelaki of Aviva Investors explained the importance of establishing a robust framework to embed ESG considerations into the investment process. They discussed how the principles of responsible investment can positively impact investment outcomes and looked at how the unique challenges faced by portfolio managers are not insurmountable.

They shared examples from France, where principles of socially responsible investing (SRI) are government endorsed and integrated into the French short-term investment market.

According to the US Forum for Sustainable and Responsible Investment, between 2016 and 2018, sustainable, responsible and impact investing grew by more than 38%, rising from US$8.7trn in 2016 to US$12trn in 2018.

Borhaug explained how Aviva has established a Global Responsible Investment (GRI) team, comprising 22 employees, including herself, to ensure material ESG factors are considered when determining the firm’s macro investment outlook. Borhaug opened the session by defining what ESG is and explaining the difference between ESG investing and ethical investing.

“E, S and G are often referred to as ‘non-financial’ factors but they are in fact factors that can have a financial impact on a company,” commented Borhaug.

There is a belief that companies that focus on ESG factors will outperform their peers that don’t place as much emphasis on it. For money market funds (MMFs) it is about maximising risk adjusted returns.

When polled about what ‘ESG adoption by an investment manager is’, 83% of the audience thought it was both a means to do good and a way to mitigate risk and enhance returns.

The presentation highlighted the regulatory pressures which are influencing client demand and the impact these pressures have on clients. They are starting to consider embedding ESG into their investment strategies, requiring corporate disclosure and public disclosure – new product needs are driving new product launches.

ESG and investing into MMFs was also discussed in the context of the three key considerations of security of capital, liquidity and yield.

There are ESG risks that may materialise any time and, for this, taking ESG factors into consideration acts as a risk management tool and risk mitigation more so than a return enhancer. There can be a strong correlation between tail risk and ESG metrics.

The second poll during the live event asked ‘How important is ESG integration for a MMF?’

  • Interesting but unlikely to influence the decision – 6%
  • Likely to be among a number of determinant factors – 61%
  • Likely to be one of the key determinant factors – 33%

The presentation concluded with a discussion on what investors should look for in a manager and a look to the future. Angelaki highlighted the following attributes in any manager:

  • Dedicated research team.
  • Integration of ESG team output into investment process.
  • Proprietary scores/ESG metrics.
  • Qualitative research output.
  • Evidence of firm-wide commitment.

“Look for asset managers that categorise their funds and strategies according to the sustainable investing spectrum/objectives and what applies to each category,” commented Angelaki.

It is clear that ESG considerations are rapidly moving up the agenda, particularly where investment strategies are being developed.

Aviva Investors will continue to work tirelessly to help to build capital markets that factor in people and the planet, as well as profit. They are participating in conversations to encourage sponsors of asset-backed commercial paper (ABCP) to research, disclose and standardise the ESG ratings of their programmes.

If you missed the webinar and would like to hear the full recording:
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