The Complexities of Responsible Investing
We believe Responsible Investing is a complex topic and are avoiding an over-simplification of the issues that can prove to be impractical.
Responsible Investing assets have grown to $35 trillion, increasing 540% since 20161. Over the past several years, Responsible Investing has gained significant attention from central banks, politicians, businesses and investment managers. While there is a wide variety of views on this topic and many interpretations of what makes for valid Responsible Investment decisions, it generally refers to the consideration of environmental, societal and governance (ESG) issues by an investment manager during the research process. Research approaches range from those that exclude companies that don’t meet an investor’s definition to more sophisticated approaches that integrate a breadth of factors into a holistic assessment of how each company is addressing its impact on environmental, societal and governance issues. This category of investing is forecast to grow 15% to $53 trillion by 20252.
We have heard a wide range of thoughts from clients related to the topic of Responsible Investing. While there is a degree of common understanding in some areas, there are other issues where there is little common ground. Beyond finding agreement on selecting issues and measuring impact, there are many different views about how one’s values should play a role in an investment portfolio. As an investment manager, our main focus is finding high-quality companies to invest in for the long term. We do need to assess trends that may impact the drivers of investment returns, such as economic growth and corporate profits.
ESG trends should be considered so we can make an assessment as to the impact of such trends on the companies we invest in. Our research process takes a fundamental approach to assessing these changes by seeking new opportunities or avoiding risks created by ESG factors. We do, though, balance these considerations with many drivers of investment risk and return.
We believe Responsible Investing is a complex topic and are avoiding an over-simplification of the issues that can prove to be impractical. Shifting attitudes toward ESG issues can lead to changing legal and regulatory environments, and companies incorporate into their strategic decisions how these shifts can impact their revenues and profits in the years ahead. We have to understand how each company is adjusting to these shifting trends that could impact their profits. It is good investment management to consider such risks and incorporate their potential impact into investment decision-making.
Such long-term secular shifts can bring about investment in new technologies and evolving consumer preferences, and we are focused on identifying companies positioned to benefit from such trends. This includes our research team seeking to identify companies with innovative technology and poised to capture the opportunity in a sustainable, profitable manner.
As a society we are constantly learning and adapting to change. As investors, it is prudent for us to be mindful of the changing environment and adapt our portfolios accordingly, but it is critical that we do so accounting for nuances and tradeoffs that present themselves, and understand that simple approaches may not always achieve the desired outcomes.