Sustainable Investing: Perspectives From ESG Leaders
Asset owners share their current practices, preferences and challenges
Investors worldwide now understand the importance of ESG factors—as both a source of risk and an opportunity to create value. While many people have questions about how to implement these principles within their portfolios, top institutional asset owners in Northern Europe are leading the way.
In a survey commissioned by American Century Investments and carried out by Danish consultant Kirstein A/S, asset owners from the Netherlands, Sweden, Denmark, Norway and Finland reveal differences in why and how they incorporate sustainable mandates and measure value.
Explore insights from world leaders in sustainable investing and learn what our head of sustainable investing, Sarah Bratton Hughes, has to say about how the landscape is evolving.
A Firm Commitment to Investing Sustainably
There’s no turning back for leading asset owners—they are committed to embedding sustainability in their investment portfolios. And they expect the same commitment from the asset managers they work with. Most asset owners now consider only article 8 and 9 funds.¹
The European Union is far from the only regime implementing sustainability guidelines. The UN Principles for Responsible Investment notes that "[among] top 50 economies, 48 have some form of policy designed to help investors consider sustainability risks, opportunities or outcomes.”²
Research Panel Breakdown by Country and AUM
¹As defined by the European Union’s Sustainable Finance Disclosure Regulation (SFDR), Article 8 and 9 products consider sustainability in a binding way. Article 8 products promote environmental or social characteristics in the pursuit of other financial objectives. Article 9 products seek to make a positive impact on society or the environment through sustainable investment and have a nonfinancial objective at the core of their objective.
²Principles for Responsible Investment, “Responsible investment regulation map,” September 9, 2019.
We expect policies and regulations governing sustainable investing to expand, with some of the potentially most impactful unfolding in the United States.
Active ESG Strategies Have the Edge Over Passive
Asset owners favor active management in ESG investing over passive or enhanced passive strategies. Integration is the preferred active approach, followed by best in progress.
Integration is Clearly the Favored Active Approach
True Progress Requires Active Engagement
Engaging with investee companies and reporting on the progress that engagement generates shows that ESG factors are truly integrated into the investment process.
The emphasis here is on progress. Two activities asset owners believe asset managers should pursue are:
Meeting regularly with senior management at investee companies
Monitoring and reporting on progress and outcomes
Engagement Activities With Positive Impact on ESG
“We believe that best in progress is one way to provide both ESG improvement and traditional alpha.”
Sarah Bratton Hughes, Head of Sustainable Investing
Expected Influence of Different ESG Approaches on Financial Performance
Asset owners identified their top three elements for ESG reporting:
Progress and outcome of engagement activities
Greenhouse gas intensity
Carbon footprint
Kirstein A/S is not affiliated with American Century Investments.
Many of American Century's investment strategies incorporate the consideration of environmental, social, and/or governance (ESG) factors into their investment processes in addition to traditional financial analysis. However, when doing so, the portfolio managers may not consider ESG factors with respect to every investment decision and, even when such factors are considered, they may conclude that other attributes of an investment outweigh ESG considerations when making decisions for the portfolio. The consideration of ESG factors may limit the investment opportunities available to a portfolio, and the portfolio may perform differently than those that do not incorporate ESG considerations. ESG data used by the portfolio managers often lacks standardization, consistency, and transparency, and for certain companies such data may not be available, complete, or accurate.
ESG Definitions:
ESG Integrated: An investment strategy that integrates ESG factors aims to make investment decisions through the analysis of ESG factors alongside other financial variables in an effort to deliver superior, long-term, risk-adjusted returns. Therefore, ESG factors may limit the investment opportunities available, and the portfolio may perform differently than those that do not incorporate ESG factors. Portfolio managers have ultimate discretion in how ESG issues may impact a portfolio's holdings, and depending on their analysis, investment decisions may not be affected by ESG factors.
ESG Focused: An investment strategy that focuses on ESG factors seeks to invest, under normal market conditions, in securities that meet certain ESG criteria or standards in an effort to promote sustainable characteristics, in addition to seeking superior, long-term, risk-adjusted returns. This investment focus may limit the investment opportunities available to a portfolio. Therefore, the portfolio may underperform or perform differently than other portfolios that do not have an ESG investment focus. ESG-focused investment strategies include but are not limited to impact, best-in-class, positive screening, exclusionary, and thematic approaches.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
No offer of any security is made hereby. This material is provided for informational purposes only and does not constitute a recommendation of any investment strategy or product described herein. This material is directed to professional/institutional clients only and should not be relied upon by retail investors or the public. The content of this document has not been reviewed by any regulatory authority.