Page 22 - Taking Stock 22 Summer 2019

Ethical investment spectrum ESG investor behaviour is characterised by a sliding scale of commitment among investors, and consequently the level of priority that they accord it differs. At one end of the scale are those who are sometimes described as philanthropic investors and are highly committed to allocating funds within a clearly de ned ethical framework. They prioritise making a positive impact ahead of making portfolio returns, especially in the shorter-term. Further along the scale, many institutions remain focused on delivering long-term performance to their underlying investors but genuinely take ESG oversight seriously. They may well engage with the fund manager every quarter and pay close attention to the ESG credentials of all stocks within the portfolio. At the other end of the ESG commitment scale are investors for whom ESG is perceived as a hygiene factor, and whose primary focus is rmly on maximising returns. The expectation is that controls are in place to manage the most signi cant ESG risks and ensure that the governance requirements of the mandate are being met. It is perhaps unsurprising that investment managers adopt differing approaches to managing ESG risks in their portfolios. Some see this as a hygiene factor re ected in a policy that sets out a broad approach to regulatory compliance and managing the risk of ESG impacts. However, others view it as an opportunity to build their entire investment process around an ethical framework. Instead of a mere marketing tool, they see it as a way to achieve environmental or social outcomes while delivering long-term value to investors. 1 The Global Impact Investment Network (GIIN): Global Impact Investor Survey 2017, (2018), p3 https://thegiin.org/research/ publication/annualsurvey2017 This variety of approaches was re ected in a recent Global Impact Investor Network survey that showed 66%1 of impact investment managers principally target risk-adjusted market rate returns. This implies that they are unwilling to accept a below-market return while pursuing ESG focused investments. However, investment opportunities are available that deliver positive environmental and social outcomes alongside return expectations – impact investors can be values driven while also seeking positive investment outcomes. 2 22 2