Tim Manuel, UK Head of Responsible Investment, Aon
Globally, investors are beginning to acknowledge that non-financial risks may have a meaningful impact on long-term financial performance.
Companies and investment managers are reacting to increasing demands from investors to understand specific, non-financial aspects of their business by providing more appropriate disclosures.
Many governments around the world increasingly view responsible investment as imperative and are encouraging, guiding or legislating that investors and companies operating within their borders must be able to deliver on sustainability, climate and social development goals and promises.
Responsible investment, and more specifically environmental, social and governance (ESG) integration, builds on the premise that robust, long-term sustainable investment returns are dependent on stable, well-functioning and well-governed companies, industries and economies.
While consideration of ESG data has not traditionally been included as part of traditional fundamental financial analysis, assessing these non-financial risks can provide financial opportunities. This area should be of interest to investors hoping to build investment portfolios that are resilient to change and deliver better long-term risk-adjusted returns.
The universe of investment approaches
Responsible investment can be viewed as an overarching theme for a number of investment approaches.
At Aon, we consider the universe of responsible investment to have four main components: ESG integration, impact investing, mission-related investing (MRI) and socially responsible investing (SRI).
From our global survey on responsible investment, 47% of the investors we polled favoured the integration of ESG factors into investment decisions over other types of responsible investment. SRI came second at 24% (Source: Global Perspectives on Responsible Investing).
As the oldest of the four broad responsible investment categories, SRI tends to be the area most investors are familiar with. SRI tends to use a negative selection process; excluding certain sectors or investments from a portfolio based on an individual’s or an organisation’s value system. On the other hand, impact investing typically focuses more on positive investment inclusion criteria rather than negative screening.
What can investors do?
A great place for investors to start is to understand the risks and exposures already embedded in their portfolio and to review their current policies. Scenario testing, for example, is a useful tool to understand how broader influences such as climate change may impact future results.
Investors should have a clear understanding of their investment managers’ policies and actions. We have set out five questions below which investors can ask their investment managers to begin this process.
– What is your approach to responsible investment and how do you believe it will add value or reduce risk?
– Are you a signatory to the United Nations Principles for Responsible Investment (UNPRI)? The UNPRI is a set of six principles
– signatories should be able to provide their latest transparency or assessment reports. These outline a manager’s approach and provide high level assessment from the UNPRI.
– Do you have resources dedicated to responsible investment?
– How do you incorporate responsible investment into your investment decision-making for our portfolio?
– Are you able to provide examples of how you have incorporated responsible investment views into your investment decision-making?
This type of exercise can help investors shape their own Responsible Investment policies and ESG beliefs.
Evolving landscape
The responsible investment landscape is evolving and the pace of change is rapidly accelerating. Regulators are applying pressure on investors globally and investment managers are reacting by launching products and implementing and updating ESG policies. We believe long-term investors should define their own Responsible Investment beliefs.
