Impact and environmental/social/governance (ESG) investing are reshaping adviser and investor relations. They are fast becoming the business model of the future, with investors exercising a greater degree of diligence on how their investments are bringing wider benefits.
Impact investing aims to generate specific social or environmental effects alongside financial gain.
ESG investing uses nonfinancial environmental, social, and governance factors to evaluate companies and countries on how far advanced they are with sustainability.
In particular, ESG is a significant growth area within the funds industry, and with increasing emphasis being placed on these indicators by investors and regulators, one that is not going to reverse.
A Duty of Care
When the United Nations Environment Programme commissioned Freshfields in 2005 to interpret the law with respect to investors and ESG issues, the report concluded that not only was it permissible for investment companies to integrate ESG issues into investment analysis but it was arguably part of their fiduciary role to do so.
In 2014, the Law Commission in England and Wales confirmed that there was no bar on pension trustees and others from taking account of ESG factors when making investment decisions. It, therefore, has become abundantly clear that failing to consider all long-term investment value drivers, including ESG issues, is a failure of fiduciary duty.
Impact Does Not Impair Profit—It Actually Drives It
Since the UN Principles for Responsible Investing were established in 2006, investment institutions from more than 50 countries, holding in excess of $90 trillion of assets, have signed the pledge to factor social and environmental welfare into investment decisions.
As one of the advisers of a leading European pension fund recently put it, "We have zero tolerance for fund managers who are in denial of the importance of ESG factors." Furthermore, there is a growing demand on institutional investors, especially in North Western Europe, to demonstrate proof of the impact of their ESG investments.
Prominent business leaders understand that impact investing does not impair profit—it actually drives it. They have realized that social and environmental consciousness is quickly becoming an inescapable reality for businesses and that, to remain competitive, they must evolve.
More than 450 investors allocated $1.3 trillion to impact investments worldwide in 2016, raising demand for impact investing products and services. Family offices and living donor foundations have been leading the charge. For example, the Ford Foundation has allocated $1 billion from its endowment to impact investment, the largest commitment of its kind by a private foundation.
Large investor groups are responding to a similar shift in values among their clients and savers. This has been led by asset management firms and banks, which collectively manage $85 trillion of individual and smaller institutions assets. Pension funds, the second largest group of investors in the world ($41 trillion), are now also moving in the direction of impact investing under the pressure of pension savers.