The popularity of investment products managed through an environmental, social and governance (ESG) lens continues to grow. And the ESG space is evolving to fit the needs of increasingly diverse investors – both retail and institutional.
The biggest change we’ve seen in the past few years is the growing recognition that the ESG investment approach isn’t going away and that the old tropes about weaker performance have been proven incorrect.
Although predictions about the direction of ESG abound, there are a few core themes about the future of this space that we’ve identified during our work with investment professionals across North America.
Brand and governance beats financials
According to an Ocean Tomo study, approximately 83% of a company’s share price on the S&P 500 Index in 1975 was based on tangible assets, meaning things like past earnings results, real estate and equipment. This meant that a company’s reputation didn’t matter nearly as much to its stock price as its last quarter’s earnings results.
In 2015, a full 84% of a company’s valuation was based on intangible assets, meaning things like brand, intellectual property, goodwill and reputation. And this number has continued to rise since 2015. What this tells us is that, today, it’s more important to maintain a strong reputation and brand, and to be viewed in a positive light, than to simply have a solid quarter.
Why does this matter in the context of ESG trends? Because ESG screens – particularly those that focus on governance – are specifically designed to improve performance by screening out companies that are at higher levels of reputational risk for any number of reasons.
Increasing access to information
The top trend in the ESG space is access to – and reliance on – different data sources for ESG research and investment direction.
In the past, investment managers usually had access to one or two sources of ESG research/information that they would base their investment decisions on. Today, many investment managers pull information from multiple leading sources including Bloomberg, Dow Jones, Morningstar and MSCI, which all offer different, but meaningful, ESG insights based on largely unique methodologies.
This additional information is being leveraged by many of the largest asset managers around the world as they build out their ESG-related product shelf and service offering.
With more information comes more regulations
Although there’s an increasing amount of information available in the ESG space, not all of it is created equal.
Given the amount of money flowing into this space, guidelines as to how information is gathered and distributed have been driving providers of this information to follow stricter parameters. Regulators want to ensure the information being provided comes as advertised based on an agreed-upon framework.
Transparency isn’t just a good idea
Investors no longer blindly assume company management will always make the right decisions to drive their company’s valuation higher. Weak governance has repeatedly been shown to detract from share prices.
As stock prices continue to be driven less by financials and more by intangibles like brand and governance, investors are demanding corporate leadership avoid decisions that negatively impact their investments’ longer-term performance.
Company leadership is taking notice of this demand, with c-suite executives and board members being replaced faster when missteps occur. Diversity is also continuing to grow in company management, as this is what is widely expected by investors today.
These are just a few changes unfolding in the ESG space. We’re seeing many other trends as well, including better marketing and evolving sales opportunities, and we’d be happy to discuss them with you.