Investors turning away from negative ESG screening
Page 1 of 1
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.
More from Morningstar
Glenn Freeman is Morningstar's senior editor.
© 2017 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.