02.24.2020
By Shanny Basar

ESG Research Set For Significant Growth

Environmental, social and governance research remains one of the few growth areas in the research market according to consultancy Integrity Research.

Michael Mayhew, Integrity Research

Michael Mayhew, founder of Integrity Research, said in a blog that ESG has been one of the fastest growing segments of sell-side equity research in the past few years and he expects this to continue to grow for the foreseeable future.

“We would not be surprised to see significant ESG analyst moves and new hiring, like the ones seen recently from Credit Suisse and JPMorgan, in the coming years as ESG research remains one of the few growth areas in the research space,” added Mayhew.

He cited JP Morgan hiring Jean-Xavier Hecker and Hugo Dubourg as co-heads of ESG equity research for the Europe, Middle East and Africa from Exane BNP Paribas. In addition, Credit Suisse promoted Phineas Glover to head of ESG research for Asia-Pacific.

ESG investing was boosted this year by the annual letter from Larry Fink, chairman and chief executive of BlackRock, which said that climate change is the the top issue that clients around the world raise with the asset manager.

Larry Fink, BlackRock

“In the near future – and sooner than most anticipate – there will be a significant reallocation of capital,” Fink added.

Mindy Lubber, chief executive and president of sustainability a nonprofit Ceres, said in a statement that BlackRock’s stance was a  “major turning point.”

“By putting sustainability integration front and center in their investment decision-making, BlackRock adds its enormous support to the global collective action of major investors and companies around the world that are already addressing sustainability risks and opportunities in their portfolios,” added Luber. “BlackRock’s renewed promise to actively engage, and when necessary, vote against companies that are not making sufficient progress on sustainability and climate risk will help to build a more transparent capital market system.”

ETFs

BlackRock said its new investment approach would include exiting investments that present a high sustainability-related risk, such as thermal coal producers, and launching new investment products that screen fossil fuels.

The fund manager intends to double its ESG exchange-traded funds over the next few years to 150, including sustainable versions of flagship index products.

FTSE Russell, London Stock Exchange Group’s  index business, said in a blog that record assets flowed into ESG exchange-traded funds  last year.

“Investors entering this asset class have been rewarded in recent years in terms of performance, as reflected by the FTSE US All Cap Choice Index, part of the FTSE Global Choice Index Series, which rose 33.5% for the year relative to a 31.3% return for the FTSE USA All Cap Index on which it is based,” added the blog.

Hedge funds

An increasing number of institutional investors are also requiring their hedge fund managers to include ESG in their investment process according to a new report.

Nearly half of of institutional investors, 45%, now believe ESG-based hedge funds offer opportunities to generate alpha, while also offering a more defensive portfolio that looks beyond the blind spots in markets that are slow to price in ESG risks.

The survey, Sustainable investing: fast forwarding its evolution, by KPMG, the Alternative Investment Management Association (AIMA), Chartered Alternative Investment Analyst Association (CAIA) and CREATE-Research involved 135 institutional investors, hedge fund managers and long-only managers with total assets of $6.25 (€5.8) trillion in 13 countries.

Anthony Cowell, head of asset management at KPMG and co-author of the report, said in a statement: “In the hedge fund industry, ESG has gone from being a nice-to-have to a must-have”.

Amongst hedge fund managers, 15% said they are at the mature stage of adopting ESG with 44% at the ‘in progress’ stage.

However, adoption has been hampered by the difficulties in measuring the link between ESG factors and investment outcomes.

Amin Rajan, chief executive of CREATE-Research and co-author of the report, said in a statement: “Creating the necessary infrastructure of data, skills and technology is proving challenging. Investors and their managers are having to climb a steep learning curve via learning-by-doing.”

The survey concluded that ESG concerns are the biggest challenges of our age and investing across the broader financial services is poised to gain further traction with governments, regulators, asset owners and asset managers pulling in the same direction.

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