What's next for ESG integration? Insights from 2017 IRRI Survey

For anyone wishing to get an understanding of the SRI market, what's driving it and which trends are likely to accelerate in the near future, I recommend taking a look at the insights generated by the 2017 IRRI survey that were published last week.

Beside the positive surprise of seeing Contrast Capital rated a as one of the top 10 investment consultants in sustainability investing (many thanks!), I personally found a couple of insights regarding where we stand on ESG integration (the closest thing we have to a true mainstreaming of sustainability thinking across all investment activities) particularly surprising:

1. 90% of asset owners require sustainability factors to be taken into account in new mandates. This is encouraging, but the real insight is in the subtext: only half of them require this to be done explicitly; the other half allows it to be implicit. This perhaps suggests that whilst ESG integration continues to be seen as desirable, we as an industry still lack clarity about what it looks like and how it can be effectively monitored. By definition, if ESG analysis is seamlessly embedded in the investment process, it will be hard to isolate as a discrete factor driving investment decisions. This may point to a need for other measures to be developed (like for instance the assurance of so-called RI investment processes) that can contribute towards building confidence among asset owners about the ability of asset managers to systematically consider relevant ESG factors in investment decisions.

2. Sustainability themes strategies (and particularly low-carbon strategies) are expected to develop faster than investment strategies based on integrated fundamental analysis. Again this suggests that we may have collectively stalled on driving further development in ESG integration. This can be partly explained by the fact that it is certainly more interesting to build an investment narrative around a popular topic (e.g. climate, SDGs) than to communicate on incremental improvements to an overall investment processes. But it is probably also due to the fact that we have reached some limits in our quest for ESG integration in valuation techniques and that the industry has lost its appetite for discovering the magic formula of ESG integration in financial modelling. So where do we go from here?

3.  Sell-side analysts consider industry analysis and company strategy as the areas of research most likely to yield links between sustainability factors and valuation. This insight offers an interesting silver lining to the concerns identified above. Maybe the industry has become too obsessed with finding the perfect solution to the integration conundrum (i.e. how to accurately quantify corporate sustainability performance and feed it in financial models). Maybe the insight provided by the sell-side (i.e. to focus on understanding industry dynamics and drivers of long-term competitiveness, two areas where ESG analysis is highly relevant) should be seen as useful advice for all asset managers, whether they manage sustainability themed strategies or seek to improve their existing investment processes.

Such insights are incredibly useful to continue the debate on ESG integration within the industry and to drive innovation and progress towards mainstreaming.

Our thanks go to Extel and SRI-Connect for enabling this industry-wide analysis to take place and to all participants for sharing their views. Thanks again to those who voted for Contrast Capital as a one of the most engaged consultants in this space. We value our independence but we would be nothing without the recognition of our peers! We are also pleased to be working collaboratively as part of the SIMI network to help all players accelerate their efforts regarding sustainability investing.