A growing number of wealth management businesses are incorporating consideration to ESG factors into their practices, off the back of high investor demand and in a sign that the industry is seeing a transfer of power from firms to clients.
The premise that a blend of environmental, social and governance factors can significantly influence investment performance is certainly not a new idea. In a 2010 study by Accenture and the United Nations Global Compact, 93 per cent of some 770 corporate chief executives said sustainability would be “critical” to the future success of their firms, despite the economic downturn.
At the time, a “major barrier” CEOs cited to embracing more sustainable business strategies was a lack of recognition from the financial markets, says Dr James Gifford, executive director at the UN-backed Principles for Responsible Investment - a network of international investors collaborating to enforce six principles for responsible investment.
As part of the network, signatories to the PRI are encouraged to pool their resources together and engage with other firms. The initiative also promotes the collaboration of investors in addressing “systemic problems,” which the PRI says if tackled could ease financial volatility and reward long-term responsible investment.
In a sign that businesses are beginning to take sustainability more seriously, Dr Gifford explains to Family Wealth Report how in the last year alone over 300 signatories have engaged with at least one other firm on their approach to ESG.
Dr Gifford notes how there was a “huge increase” in private equity firms signing up to the PRI in the wake of the financial crisis - driven in part by a shift in power from private equity firms to their clients. “Private equity investors were demanding their managers to consider ESG issues in more detail, given their ability to materially impact the valuation of investments over the longer term, and the industry had to respond.”
The Social Investment Forum Foundation’s 2010 report on socially responsible investing trends illustrated that SRI in the US has continued to grow at a faster pace than the broader universe of conventional investment assets; between 2007 and 2010, professionally-managed assets remained “roughly flat” overall, while SRI assets on the other hand “enjoyed healthy growth.”