Why more and more investors now look to ESG as a source of investment returns
Effective ESG integration offers a path to potentially generating real and sustainable return in investment portfolios to help you meet your personal financial goals
Steven Rees, head of investments, Middle East and North Africa, J.P. Morgan Private Bank.
The world is currently operating in a ‘linear economy’, which is an unsustainable take-make-waste model. If we continue on this path, by 2050, global demand for resources will almost triple to 130 billion tons annually, which would overuse the earth’s capacity by more than 400 percent.
A circular economy was introduced to change all this, seeking to eliminate waste from the start and create ‘closed loops’ that keep materials within the system. A circular economy is a model of production and consumption that advocates reusing, repairing, leasing, and recycling materials and products. The shorter or tighter a loop, the better because it typically would yield the most savings by reducing labour and energy costs.
The implications of population growth, rising pollution levels, deteriorating infrastructure and the depletion of the earth’s natural resources are noticed globally. There is a growing demand for investments in clean energy, water infrastructure, sustainable agriculture and waste recovery, making investments in companies and funds that access these environmental markets attractive for financial return and sustainable impact.
Not too long ago, ESG (environmental, social, governance) investing was widely viewed as a valued-aligned strategy, or a way to look humanitarian and philanthropic, but not any more. Today, market participants increasingly understand that ESG analysis can be useful when integrated into the investment process. Done properly, ESG integration — actively considering ESG factors into investment due diligence and financial analysis — may help deliver enhanced risk-adjusted returns over the long run. It’s not an either/or proposition, social values or investment performance.
Today, the rising imperative for investment, and a strategic focus for governments and companies alike, is sustainability. It is both a foundation for profitable growth and in response to the mounting concerns over the state of the world and our planet and not least as we deal with the repercussions of a global health crisis.
From all the sustainable investing strategies, impact investing may be the most exciting of all. It was made with the intention to generate measurable positive social or environmental impact alongside a financial return.
Recent studies have shown that private market impact investing funds can achieve targeted returns while fulfilling their intended social or environmental missions. As with any investment, proper due diligence is paramount when evaluating impact investments.
But not all ESG investing is created equal. Many ESG factors compete for an investor’s attention. Investors need to focus on material ESG factors — those factors that have a fundamental impact on a company’s financial well-being — which can differ depending on the sector or industry.
Today, the rising imperative for investment, and a strategic focus for governments and companies alike, is sustainability
For example, electric utility companies play a key role in generating and distributing power, so greenhouse gas emissions (GhGs) are a material factor; on the other hand, cybersecurity issues may be less front and centre. But for a financial payments company, it’s the other way around: Cybersecurity issues are paramount, while GhGs likely play a less significant role in analysing risks and opportunities.
Materiality can also depend on whether you’re looking at E, S or G. Governance factors, such as board structure and diversity, are generally considered foundational and broadly applicable to all sectors. However, when looking at environmental and social factors, investors can benefit from focusing on a narrower set of factors with the highest (most material) impact.
Effective ESG integration offers a path to potentially generating real and sustainable return in investment portfolios to help you meet your personal financial goals.
Evidently, more and more investors now look to ESG as a source of investment returns. Integrating ESG analysis — whereby investors may identify positive signals as well as risks to avoid — can strengthen investment performance. ESG equity indices have performed in line with, or in some cases outperformed, traditional indices.
Equities with higher ESG ratings tend to be more competitive and profitable, driving strong returns. Similarly, bonds that have higher ESG scores tend to have higher average credit quality.
Steven Rees, head of investments, Middle East and North Africa, J.P. Morgan Private Bank
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Why more and more investors now look to ESG as a source of investment returns
Effective ESG integration offers a path to potentially generating real and sustainable return in investment portfolios to help you meet your personal financial goals
Steven Rees, head of investments, Middle East and North Africa, J.P. Morgan Private Bank.
The world is currently operating in a ‘linear economy’, which is an unsustainable take-make-waste model. If we continue on this path, by 2050, global demand for resources will almost triple to 130 billion tons annually, which would overuse the earth’s capacity by more than 400 percent.
A circular economy was introduced to change all this, seeking to eliminate waste from the start and create ‘closed loops’ that keep materials within the system. A circular economy is a model of production and consumption that advocates reusing, repairing, leasing, and recycling materials and products. The shorter or tighter a loop, the better because it typically would yield the most savings by reducing labour and energy costs.
The implications of population growth, rising pollution levels, deteriorating infrastructure and the depletion of the earth’s natural resources are noticed globally. There is a growing demand for investments in clean energy, water infrastructure, sustainable agriculture and waste recovery, making investments in companies and funds that access these environmental markets attractive for financial return and sustainable impact.
Not too long ago, ESG (environmental, social, governance) investing was widely viewed as a valued-aligned strategy, or a way to look humanitarian and philanthropic, but not any more. Today, market participants increasingly understand that ESG analysis can be useful when integrated into the investment process. Done properly, ESG integration — actively considering ESG factors into investment due diligence and financial analysis — may help deliver enhanced risk-adjusted returns over the long run. It’s not an either/or proposition, social values or investment performance.
Today, the rising imperative for investment, and a strategic focus for governments and companies alike, is sustainability. It is both a foundation for profitable growth and in response to the mounting concerns over the state of the world and our planet and not least as we deal with the repercussions of a global health crisis.
From all the sustainable investing strategies, impact investing may be the most exciting of all. It was made with the intention to generate measurable positive social or environmental impact alongside a financial return.
Recent studies have shown that private market impact investing funds can achieve targeted returns while fulfilling their intended social or environmental missions. As with any investment, proper due diligence is paramount when evaluating impact investments.
But not all ESG investing is created equal. Many ESG factors compete for an investor’s attention. Investors need to focus on material ESG factors — those factors that have a fundamental impact on a company’s financial well-being — which can differ depending on the sector or industry.
For example, electric utility companies play a key role in generating and distributing power, so greenhouse gas emissions (GhGs) are a material factor; on the other hand, cybersecurity issues may be less front and centre. But for a financial payments company, it’s the other way around: Cybersecurity issues are paramount, while GhGs likely play a less significant role in analysing risks and opportunities.
Materiality can also depend on whether you’re looking at E, S or G. Governance factors, such as board structure and diversity, are generally considered foundational and broadly applicable to all sectors. However, when looking at environmental and social factors, investors can benefit from focusing on a narrower set of factors with the highest (most material) impact.
Effective ESG integration offers a path to potentially generating real and sustainable return in investment portfolios to help you meet your personal financial goals.
Evidently, more and more investors now look to ESG as a source of investment returns. Integrating ESG analysis — whereby investors may identify positive signals as well as risks to avoid — can strengthen investment performance. ESG equity indices have performed in line with, or in some cases outperformed, traditional indices.
Equities with higher ESG ratings tend to be more competitive and profitable, driving strong returns. Similarly, bonds that have higher ESG scores tend to have higher average credit quality.
Steven Rees, head of investments, Middle East and North Africa, J.P. Morgan Private Bank
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