ESG MAKEOVER FOR INVESTMENT INDUSTRY Growing concern about environment, social and governance issues – allied to a potential flight to quality amid the COVID-19 pandemic look set to accelerate adoption of ESG analysis worldwide. Here Lesley Duncan, Deputy Head of UK Equities at Aberdeen Standard Investments, outlines five ESG trends that she believes are set to reshape investing in coming years. 1. Environmental impact Severe weather phenomena have infused global news coverage and social media over the past year. With climate change forecast to heighten the intensity of weather events further in future, it will become crucial for corporates, institutional investors and asset management companies to answer two key questions: 1) how does my business/ investment impact the environment; and 2) how does the environment impact my business/investment. This will likely accelerate investment into renewable energy, and divestment from firms that deal in fossil fuels. It could also sharpen investors’ focus on the resilience of infrastructure – roads, railways, ports and airports – to climate change, prompting a shift in the composition of investment portfolios.
2. Mainstream integration While interest in ESG investing has developed in recent years, asset managers and institutional investors adopt different approaches. Some purchase ESG data from third-party providers to help inform
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portfolio decision-making, while others hire ESG analysts to engage companies only after they’ve bought them, or outsource ESG capabilities entirely to an external party. But as the narrative shifts from “how much does ESG cost” to “how do we do this”, increasingly asset managers will look to embed ESG capabilities into their own teams to strengthen their pre-investment due diligence. This will drive the mainstreaming of ESG integration over the next two years in recognition of the value it can bring in safeguarding the sustained success of portfolio companies.
3. Data drive We expect to see a meaningful improvement in the quality and consistency of ESG data. We anticipate that stock exchanges and regulators will strengthen disclosure requirements. That will compel corporates to improve the breadth and granularity of information they provide. We also expect to see investors push ESG data providers to improve their coverage of companies and consistency of their methodology. Investor demand will compel them to provide less,
