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Investors turning away from negative ESG screening

Glenn Freeman  |  21 Apr 2017Text size  Decrease  Increase  |  

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Environmental, sustainability and governance (ESG) investing approaches that exclude entire sectors are unpopular with asset managers and their investors, according to a global study conducted by State Street Global Advisors.


Around 90 per cent of asset managers in the Asia-Pacific region intend to move beyond "negative screening" ESG approaches over the next two years, the study found.

With 475 participants from across Asia, Europe, and the US, representatives from public and private pension funds, endowments, foundations, sovereign wealth funds, and central banks were surveyed in December 2016 and January 2017.

Negative screening can be particularly problematic in more concentrated markets--such as Australia--where materials and energy companies comprise around 15 per cent of the ASX in terms of total market capitalisation.

In a global context, the study showed around 80 per cent of investors have incorporated some ESG awareness into their strategy--with this number climbing to 85 per cent in the Asia-Pacific.

"The start of the integration is well underway, because of this significant number who do have ESG in their strategy," says Kevin Anderson, head of investments for Asia Pacific, SSGA.

"Overall, the survey indicated that over 25 per cent of the worlds' professionally managed assets--around $23 trillion--have an ESG focus to them. So, that's an interesting gauge that suggests there is a trend that could continue."

He also points to a growing awareness of the correlation between ESG factors and financial performance, with 77 per cent of respondents highlighting the connection.

"I think we're moving from a lens that used to be more values-based ... [and] it's increasingly turning to 'how do I ensure that my other objectives can be met, I want to balance financial returns with doing good,'" Anderson says.

Morningstar rolled out its analytics-based ESG screening approach, Sustainability Ratings, in mid-2016, in partnership with ESG ratings specialist Sustainalytics.

This approach doesn't penalise certain industries for involvement in products or industries that are typically perceived as "bad". The Morningstar Sustainability Rating leaves such judgement calls to individuals, rather than trying to use an algorithmic process.

"Analytics and data providers, along with index providers, all have a role to play in increasing the transparency by which you can judge the attributes of the ESG strategy in your investments ... we shouldn't underestimate the role of technology in being able to tease out these factors," Anderson says.

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Glenn Freeman is Morningstar's senior editor.

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