Future of Fundamental ESG Investing
Am interviewing with a few banks to move into a fundamental ESG (Asset Management) team. I was wondering whether or not you believe ESG will be there in the long term.
Being originally from a 3rd world country I am extremly interested in ESG strategies, also the competition seems a bit "lower" than in traditional teams. But what's your opinion of ESG investing and it's future?
ESG is a major theme of investment firms today. The country's (US) culture is shifting heavily towards that as well so this will only grow. Firms are actually having an impact on the decisions of investable companies. Perhaps more in fixed income as they are constantly raising capital with new bond issues and therefore have some voice as to determining actions of the companies they invest. Equity less so as equity is a much smaller market than FI anyway (most folks don't realize that FI dwarfs equity). And far less new issues in equity than FI. Once it's int he secondary market, hard to have any impact on anything as there is typically a buyer somewhere.
ESG will get a lot of favorable press going forward, so if for no other reason, a good place to be.
Personally, I think ESG is a bit of a marketing ploy. I actually chatted with a fund that says ESG is a big part of what they do, yet they will own energy stocks. They justified it because they wrote a letter to the board or some BS about some other issue that had nothing to do with carbon emissions. It’s purely subjective and qualitative in its current form. I have a pretty big emphasis on the G in my own research process, but it is more in terms of risk assessment and incentive alignment vs some source of untapped alpha. I would expect funds to continue to market their ESG competencies though in order to attract individual investors that want to feel good about their PA’s, as well as pensions and endowments that don’t want any heat from their social justice warrior constituents and beneficiaries. You can also see it in company proxies now, they’re fully aware of the ESG movement and regardless of the business’s actual functional purpose they will have some sales pitch on how they are ESG. So I don’t think it’s going anywhere and likely will continue to have momentum near-term especially, but I would caution against becoming the “ESG guy” at a fund and specializing in that. I know some funds are starting to put together little ESG teams where from my understanding that is all they do and they don’t have much influence on the actual book. I wouldn’t want to be that guy, I think you want to land where ESG is just a part of the process.
Regarding owning energy stocks, a theme surrounding many ESG platforms is "progress not perfection". So they may invest in lots of things one would think anti ESG but they like to see improvement. An energy company that is making major investments in green tech as an example.
Currently work as a part-time intern at a fundamental ESG AM fund and can give bit of insight.
I believe that ESG will continue to grow. In my own personal opinion, I agree with Secyh62 that it seems to be mostly sort of a marketing ploy. I believe It is more the clients/investors who demand ESG focused funds that drives the rationale for why AM funds go into the ESG direction or at least have it as part of their investment process.
However, I do see the point of why you include ESG into your investment process - to minimize risk and for your holding companies to support the general sentiment that favors "greenness". As such, there will come tasks to engage on companies in relation to ESG risks. G is the most common "issue" and makes perfect sense for me to include it no matter what if you are a long term investor. However, it can feel a bit demotivating when you engage/vote on ESG issues if you only have a small % of the ownership. If you are 100% into ESG and loves it, I see no issue being the "ESG guy". I do not know their comp level, but I see them being quite desirable lately and other previous interns were also headhunted for ESG roles as more and more firms want to portray "greenness". However, I want to have more influence on the actual book and learn more about actual investing.
For the OP - what draws you to ESG investing? You mention you coming from what ostensibly is a less developed nation - why not look for an impact investing fund? Maybe someone doing direct investing? Sure - you can start your career at a large AM to get some time under your belt - probably required frankly - but I would encourage you to really look at the entire space around ESG, SRI, Impact investing, etc. Go read the USSIF reports, get familiar with the PRI (principles of responsible investing) which is effectively table stakes if you really want an ESG strategy - you sign it, lots of disclosures and overhead... I'll spare my rant about this whole contrivance, but suffice it to say that there are a lot of disclosure and communication issues within this whole space.
Moreover - this is something that's going to be around for a while. If nothing else, if you work with E&F/Pensions get used to it. Other mission based organizations will also follow suit on this front. Especially if you get a democrat in the white house - and some of those huge bills - buckle up, buttercup.
To the merits of it - I've had a lot of conversations with friends or colleagues on this front. The value of it ranges pretty heavily. As an investment process or criteria - much of it makes sense. Governance, as an example, is already built into many processes - or if it isn't, I'd suggest you leaving your fundamental fund immediately. The others are where you find out pretty quickly how dogmatic you are. Diversity on boards or the C-suite is one that is coming up now - how do you handle that? There may be some argument or research that says diverse boards perform better - I don't know off hand. And, to boot, if tons of money is flowing - or could flow - into this stuff... why not front run or at least tag along? You start to get pretty far away - at the extreme - of why investors are even allocating to these things. It's often not for pure 'performance'.
What I find fascinating is a different example - consider a community foundation or similar, who is dedicated to serving the people around them. Say they have an endowed fund that's of decent size, but pretty small. They decide that they want their investments to align with their mission. What do you do? I could cynically argue that their mission is supported by those funds - and anything that could compromise returns is stupid. Or, maybe, you take a portion of the fund and call it 'private/direct lending' - extending loans within the community (effectively a revolving loan fund) or a PE style allocation where you provide equity financing to local businesses or whatever. I'd argue either of those is far better than buying an off the shelf black rock index fund. Granted - that's getting far afield from what is considered purely 'ESG' investing in the sense that you are talking about - screening companies on a variety of criteria, alongside traditional stuff.
My point is that there are areas of this that offer opportunities for those what want to allocate money to causes, or introduce factors outside of the traditional metrics, that offers up better ways to achieve the impact. Assuming that you are doing this in good faith - maybe a wrong assumption on my part - you have to look beyond simply not buying oil majors, or investing in oil majors who are pivoting to EV items. That's the stuff i think will last - all of the other contrivances will have their day, and some will last for a while - but those smaller, and sometimes larger examples, are of interest in my view.
Fundamental environmental, social and governance (ESG) investing has a bright future. It already carries considerable weight, and 60% of all mutual fund assets are expected to be related to ESG by 2025. Demand for ESG investment funds is expected to grow sharply in the coming years. While many investors believe it is just a fad, the following are a few reasons why we believe fundamental ESG investing is here to stay.
Investor demand: Sustainable investing has strong demand from individual and institutional investors, as they prefer to use their capital to create a sustainable world.
Technological advancements: New technology helps fund managers meet growing demand for ESG investing, giving them more access to data and transparency.
Widespread encouragement to take action: Companies worldwide understand they must take action to deliver long-term growth with ESG investing. They know they need to use Earth's resources responsibly, treat workers with respect and look after the environment.
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