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ESG ‘has become integral part of investment process’

The majority of asset owners have either integrated environmental, social and governance (ESG) criteria into their investment process, according to figures from Morgan Stanley Investment Management (MSIM).

A survey of 118 participating organisations conducted by the investment bank showed that 84% are at least “actively considering” making ESG central to their investment decisions and 49% already integrating sustainable investing. Only 14% said they had not considered it or had considered sustainable investment and decided not to adopt it.

“ESG is now becoming part of the ecosystem the way that we invest," Jim Caron, New York-based head of global macro strategies at MSIM said at a presentation in London.

“I always use the analogy of having seatbelts in cars. When seatbelts first came out, some companies had them, other didn’t. Today you won’t buy a car without seatbelts, right? Now that’s just part of the ecosystem of a car manufacturer. Seatbelts go in without a question.

“It’s the same for us. When we think about our investment philosophy and our investment process, part of our ecosystem is ESG. Even if you’re not asking for it, you’re still going to get it. It’s going to be there.”

A $30 trillion market

Assets invested in accordance with ESG-related strategies reached $30 trillion last year, according to estimates by the Global Sustainable Investment Alliance, building on a 25% increase from 2014-2016.

The momentum is set to build further as millennial investors, who, according to a Morgan Stanley study, are nearly twice as likely to invest in companies and funds that meet their environmental and social values, are reportedly set to inherit an estimated $30 trillion in wealth in the coming years. 

MSIM’s international equity team recently strengthened its ESG credentials by appointing equity manager Vladimir Demine as the team’shead of ESG research in February. Demine has 17 years of investment experience and is integrating ESG into the company’s global sustainable funds range, which was launched last year.

“Our view is that the world is moving in this direction. It’s an unstoppable force in terms of client demand and we need to be positioned to reflect that. But we are in a transition period,” said Paul Price, MSIM’s global head of distribution.

Differing speeds

While sustainable investment has gained traction over the past decade, ESG integration varies across the different global markets. The US is at about 35%, well behind the Nordic markets where ESG is mainstream. While the Netherlands has also shown increasing interest,in Asia  Japan is the only country where sustainable investing is growing significantly.

In response to the differing speeds of adoption, MSIM is not telling clients what ESG policy to adopt but offers sustainable investment solutions for those who want it. 

“What we are saying is that if your moral compass is pointing in this specific direction, we as an asset management firm believe that we can still accommodate your needs on returns in the long term while also reflecting your view on how we should consciously be investing,” said Price.

“If there is marginal demand for this product, we are going to build the capability internally to fulfil that marginal demand. Because if we don’t, we miss out on that additional business,” added Caron.

Clients are increasingly looking for ESG funds that meet their investment requirements without any compromise to returns. “There is no real cost to being ESG conscious in your portfolio and in your investment decision making process,” commented Caron, admitting that is one of the first questions investors ask.

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