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Has ESG changed the investment industry?

This article examines the impact ESG has impacted both investors and the investment industry alike.

Around 20 or 30 years ago investing was largely based on a fairly straightforward paradigm: risk and return. This theory posits that potential return rises in line with risk; the greater the risk you take, the greater return you might yield, writes Christopher Edwards, partner in Mourant’s Guernsey litigation and dispute resolution team.

Now there is a third factor as we experience something of a paradigm shift in investing and wealth management: environmental, social and governance (ESG) considerations. This factor is also referred to as sustainability, green or impact investing.

Whatever you call it, many individuals are increasingly casting an eye over the environmental and social ramifications of their investing.

What has caused the paradigm shift, and what does it mean for trustees?

ESG then and now

First, we should say that considering ESG factors is not a new concern for many investors, some have always had it on their agenda, albeit by a different name.

Quite often, even Ultra High Net Worth (UHNW) philanthropic commitments were to organisations or causes based around environmentalism or doing social good. Later, ‘impact investing’ – targeting capital towards achieving ‘good’ outcomes for our society or the planet, while still generating returns – became a popular concept. Now, ESG is the preferred term.

Approaches to ESG among both mainstream and Ultra High Net Worth investors are highly personal and variable, but there is no doubt that an increasing number of investors are asking about it and how it is factored into their structuring, portfolios and wealth management. Partly this is due to a general greater interest in newsworthy phenomena like climate change.

Regulation is also playing its part. A Barnett Waddingham survey for Investment Monitor saw 91% of respondents say that evolving regulation and legal requirements are a key factor in why they take into account ESG considerations in their investment decision-making and implementation.

This is hardly surprising when you learn that the number of ESG regulations and standards globally almost doubled from 2016 to 2021.

Regulation and both consumer and public demand are combining to put pressure on institutions, who are responding in kind and feeding the paradigm shift.

Blackrock’s Larry Fink is a renowned proponent of ESG, writing in his 2022 Letter to CEOs: “Most stakeholders – from shareholders, to employees, to customers, to communities, and regulators – now expect companies to play a role in decarbonising the global economy.”

A paradigm shift is rarely caused by a single factor, and multiple influences have collided to evolve investors and fiduciaries’ approach to risk and return.