strategy-note-July2019-issue016

Environmental, Social, and Governance Issues in Investment Management

NBKCapital latestNews, Strategy Note

Kuwait: July 08, 2019

ESG strategies aim at achieving a traditional investment target of maximizing risk-adjusted return on investment, but unlike most mainstream strategies, their targets usually have a longer time horizon.

HIGHLIGHTS

  • Traditional approaches to investment management, where strictly financial factors affecting risks and returns are considered, are giving way to broader, more inclusive methodologies that consider multiple Environmental, Social, and Governance (ESG) factors.
  • ESG is the group of Environmental, Social, and Governance factors that are increasingly being considered as an integral part of the decision-making process in organizational management and more generally in the investment management process.
  • Unlike negative screening ethical investment approaches, that exclude or include investments based on ethical and “values” related factors, ESG issues are being increasingly employed as complementary to traditional risk and return approaches to investment management. ESG issues are viewed as risk and opportunity factors that would help maximize risk-adjusted returns over the long-term.
  • ESG awareness and adoption is growing fast. Signatories of the United Nations-supported Principles of Responsible Investment (PRI) Initiative topped 2,372 with total Asset Under Management in excess of USD 86 trillion in 2019. The list of signatories includes 432 Asset Owners and around 1,660 Investment Managers globally.
  • Despite the significant advances in ESG awareness and adoption over the past few years, a lot remains to be done. The list of challenges is long but the most prominent include short-term biases of individual investors and short-termism of institutional investors that is driven by the structure of management incentives, culture, and market pressure and expectations that are built around quarterly results.

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