The financial system is not operating sustainably and it often fails society. We need to realign the system with sustainable, equitable economies. As investors, we need to go beyond ESG integration to achieve a sustainable financial system. Investors have a central role to play.
Most consultants and their asset owner clients are failing to consider ESG issues in investment practice – despite growing evidence of the financial materiality of ESG issues to portfolio value.
ESG considerations seen as niche service offerings, often entailing extra costs, and only to be provided when explicitly requested by asset owner clients.
Relationships between asset owners and investment consultants have a major influence on whether and how investment consultants take account of ESG issues in the advice that they provide.
Market structure issues are compounded by consulting practices and processes.
Globally, we’ve seen growth in ESG-related regulation for asset owners and investment managers, but not investment consultants.
Our central conclusion is that investment consultants are unlikely to take action on ESG issues without stronger incentives to do so from their asset owner clients.
The near universally adopted modern portfolio theory (MPT) put forward by Nobel laureate Harry Markowitz in 1952 is blind to the effect of portfolio investment on the capital markets’ overall risk/return profile and on the macro systems upon which the market relies for stability.
Long-term social issues – the ‘S’ in ESG – matter for investors. They are key factors determining both long-term GDP growth and the level of equilibrium of interest rates.
The US accounts for the largest share of pension assets globally. Increasingly, US investors are incorporating ESG factors into their investment decisions. However, the country lags its peers in private sector retirement assets managed with explicit regard for ESG factors.
This webinar summarises the key regulatory developments for sustainable finance during the final months of the European Parliament, including on the under the European Commission’s action plan on sustainable finance and its action plan on building a capital markets union.