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From "why"  to  "why not" : Su

# Global economic

From "why" to "why not" : Su

More institutional investors recognize environmental, social, and governance factors as drivers of value. The key to investing effectively is to integrate these factors across the investment process.

Sustainable investing has come a long way. More than one-quarter of assets under management globally are now being invested according to the premise that environmental, social, and governance (ESG) factors can materially affect a company’s performance and market value. The institutional investors that practice sustainable investing now include some of the world’s largest, such as the Government Pension Investment Fund (GPIF) of Japan, Norway’s Government Pension Fund Global (GPFG), and the Dutch pension fund ABP.

 

The techniques used in sustainable investing have advanced as well. While early ethics-based approaches such as negative screening remain relevant today, other strategies have since developed. These newer strategies typically put less emphasis on ethical concerns and are designed instead to achieve a conventional investment aim: maximizing risk-adjusted returns. Many institutional investors, particularly in Europe and North America, have now adopted approaches that consider ESG factors in portfolio selection and management. Others have held back, however. One common reason is that they believe sustainable investing ordinarily produces lower returns than conventional strategies, despite research findings to the contrary.

 

Among institutional investors who have embraced sustainable investing, some have room to improve their practices. Certain investors—even large, sophisticated ones—integrate ESG factors into their investment processes using techniques that are less rigorous and systematic than those they use for other investment factors. When investors bring ESG factors into investment decisions without relying on time-tested standard practices, their results can be compromised.

 

To help investors capitalize on opportunities in sustainable investing, this article offers insights on how to integrate ESG factors with the investment process—from defining the objectives and approach for an investment strategy, through developing the tools and organizational resources required to manage investments, to managing performance and reporting outcomes to stakeholders. It is based on more than 100 interviews we conducted with CEOs, chief investment officers, ESG leaders, investment managers, and others at a range of investment funds, about their experiences with sustainable investing: how they got started, what practices they follow, what challenges they encountered, how they resolved them, and how they have enhanced their sustainable investing approaches over time.

 

Sustainable investing takes off and pays off

Once a niche practice, sustainable investing has become a large and fast-growing major market segment. According to the Global Sustainable Investment Alliance, at the start of 2016, sustainable investments constituted 26 percent of assets that are professionally managed in Asia, Australia and New Zealand, Canada, Europe, and the United States—$22.89 trillion in total. Four years earlier, they were 21.5 percent of assets.

 

The most widely applied sustainable investment strategy globally, used for two-thirds of sustainable investments, is negative screening, which involves excluding sectors, companies, or practices from investment portfolios based on ESG criteria. But ESG integration, which is the systematic and explicit inclusion of ESG factors in financial analysis, has been growing at 17 percent per year. This technique is now used with nearly half of sustainable investments.

 

The scale of the sustainable investing market differs greatly from region to region. European asset managers have the highest proportion of sustainable investments (52.6 percent at the beginning of 2016), followed by Australia and New Zealand (50.6 percent) and Canada (37.8 percent). Sustainable investing is less prevalent in the United States (21.6 percent), Japan (3.4 percent), and Asian countries other than Japan (0.8 percent), but the gap is narrowing. From 2014 to 2016, the volume of sustainably managed assets grew significantly faster outside Europe than it did in Europe.1

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