What is ESG Investing and Why Does it Matter?

Due to the drastic shift in demand for ESG investing we analysed with two of our ESG experts the relevance of this trend for fund managers.

Environmental, social, and governance (ESG) considerations are an increasingly important facet of all business decisions: 75% of both retail and institutional investors applied ESG principles to at least a quarter of their portfolios in 2019, according to Deloitte. This isn’t so surprising considering the fact that 60% of ESG funds outperformed their traditional counterparts over the past decade.

Fund managers now have the opportunity to support the development of businesses that abide by ESG ideals, whilst enjoying strong returns; and investors increasingly expect them to do so. Despite this, there remains some lack of understanding surrounding the subject and its practices in the context of investing.

Arbolus has teamed up with Henry Shilling and Ernest Gonzales, two ESG investment consultants in our network, to learn more.

What is ESG Investing?

ESG investing involves the consistent and systematic integration of relevant and material ESG factors in the investment process.

Analyses are extended to include factors that are usually overlooked and difficult to measure in part due to lack of data or long-term uncertainties. These might include: (environmental) water management, renewable energy, (social) labour standards, data privacy, healthcare, (governance) corruption, tax transparency and anti-competitive behaviour.

It is just one of several approaches to investing that fall under the umbrella of sustainable investing, which also includes impact investing, thematic investing, values-based investing and exclusions & divestiture strategies.Each of these can also incorporate engagement and proxy voting.

“Adapting to sustainable approaches can be less about restricting and avoiding "sin-stocks", and more about identifying sectors that are leading the way on sustainability and progressive technologies - presenting lucrative investment opportunities."- Ernest Gonzales - Current Finance and ESG Impact Adviser at We Grow Green Tech

Renewable energy is a key example; using technology to reduce our reliance on fossil fuels, whilst producing clean energy. In fact, a recent Imperial College study found that over a five year period, renewables investments consistently outperformed fossil fuels in the UK (75.4% Vs 8.8%) and US (200.3% Vs 97.2%).

Why is ESG Investing Important for Fund Managers?

Investment managers need to consider ESG investing for 3 key reasons:

1. Investors are demanding that ESG investing be integrated into portfolio management. There is evidence to suggest that new cash flows are being increasingly directed to portfolios that account for ESG according to Henry Shilling. Consequently, existing portfolios are highlighting their ESG credentials and creating new ESG product offerings.
2. The shift of attitude in favour of ESG is eating into non-sustainable markets’ and businesses’ performance. Fossil fuel companies, for example, are increasingly facing stranded-asset risks and onerous regulations. This bodes ill for investors in the market, says Ernest Gonzales.
3. By investing in businesses that abide by and contribute to ESG development and sustainability, fund managers are providing them with the capital needed to successfully establish their products/services. These capital flows are of vital importance if the private sector is to support progress towards targets such as the United Nations' Sustainable Development Goals.

“Sustainable investing and ESG integration are here to stay" Henry Shilling - Former Moody’s SVP, Head of ESG Risks and Opportunities

More specifically taking long positions in thematic investments, such as alternative energy, transportation, health care and low carbon investments is a strategy that may represent a potential area of opportunity. These areas have garnered significant attention and, at present, show promise.

He also notes that developing countries present future opportunities for ESG investment in that they need massive investment flows to transition to low carbon economies. In each case, investments require careful analysis and diversification. ESG integration, especially in the area of governance, can serve to mitigate downside risks and losses.

What’s the future of ESG investing?

It is clear that although many investors’ sights are still set on non-ESG investments, a turning point is inevitable.

ESG investing already presents an exciting and profitable opportunity that needs to be explored by all. Ultimately, the risk lies not in adapting one’s strategy, but rather failing to do so - when asked about the risks associated with reallocating resources to ESG investing, Henry Shilling simply responded that there may be greater risks in not integrating ESG into portfolio management.

How can Arbolus Help you Navigate the ESG Investing Space?

At Arbolus, we connect our clients with the expertise they need to navigate new spaces, source deals, and conduct due diligence.

• We source industry leading ESG investment consultants for private equity firms and asset managers who need market guidance when moving away from fossil fuel energy investments towards renewables.
• We also connect clients with experts who can provide more specific advice on ESG companies to invest in.

Click here to connect with world class experts, like Henry and Ernest.

Sam Wright

Sam graduated from the University of Bath in 2019, where he read Politics with Economics. He has experience working and studying in countries across Europe and Asia. He joined Arbolus' Barcelona office in 2020, as an Associate.

About Arbolus

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