President-elect Donald Trump has tweeted that the “concept of global warming was created by and for the Chinese in order to make US manufacturing non-competitive”. And during his election campaign Trump said he would cancel the US’s commitment made at the 2016 climate change summit – although the latest indications are he might relax this pledge – as well as pull back on its Clean Power Plan, instigated by Barack Obama.
Trump has also promised to revive the US’s ailing coal mining industry. Jonathan Bell, the chief investment officer of $ 9.5 billion private investment office Stanhope Capital, said: “There may be less investment in green energy by investors. Government policy is significantly important with regards to clean energy.”
With broad support for both green issues and improved corporate governance, at least in the developed world, funds managed under environmental, social and corporate governance – or ESG – principles have grown fast. For active fund managers, it’s a relatively high margin business and part of their response to the rising tide of cash invested via ETFs.
But now the world’s largest economy is about to be run by someone who appears hostile to many of its core principles.
Hamish Chamberlayne, a global equity manager at Henderson Global Investors, whose assets in sustainable and responsible investments funds have risen from £440 million to £900 million since 2012, said: “It’s a gross understatement to say that a Trump presidency is not something that sustainable responsible investment-minded investors would have wished for.”
Chamberlayne said Trump’s political decisions and influence could slow down the rate of growth in renewable investment areas, with money instead “flowing into perhaps more carbon-heavy parts of the economy for a period of time”.
Trump’s presence leading the world’s biggest economy is no doubt a hindrance to the climate change agenda. But AXA Investment Managers’ global head of responsible investment Matt Christensen is optimistic that global momentum outside the US is robust enough not to be derailed.
For example, at country level, the energy transition law, enacted in France in January will as of next year require asset owners and managers to report on their integration of ESG factors, climate risk and low-carbon transitioning. In the UK, HSBC announced earlier in November that it is switching its £1.85 billion equity default fund for its UK defined contribution plan into low-carbon-tilted passive mandate.
Christensen said: “We have, on one side, Trump coming into the US [as president] and, on the other, a worldwide push that’s smart and to some degree irreversible.”
The potential impact of Trump aside, headwinds remain for the sector. There is a growing frustration that despite the broader momentum, some asset managers still hide behind commitments and bold declarations about integrating ESG across their investment process without it flowing through to tangible action.
The Principles for Responsible Investment, which was set up in 2006 by the United Nations to encourage fund managers to invest sustainably, has seen the assets represented by its signatories swell from around $ 6 trillion in 2006 to around $ 60 trillion. Yet even this organisation has grown tired of fund managers hiding behind its principles and not putting any palpable ESG investment action into practice.
The PRI is looking at how it can remove members that put their names to its principles simply for show. Speaking at its conference in June, Fiona Reynolds, managing director of the PRI, said: “Just saying that you are a PRI signatory is not enough anymore. If you have got people who don’t want to do anything [apart from] just use your brand and in the process diminish your brand, we have to act on it.”
Antony Marsden, head of governance and responsible investment at Henderson, recognised there was a discrepancy between investors’ awareness and their adoption of ESG issues. He said: “I believe we are a long way from any inflection point as there is a substantial gap between awareness and adoption.”
Specifically, Eric Cockshutt, responsible investment co-ordinator at Unigestion, pointed the finger at alternatives fund managers for lagging their mainstream counterparts in this area. He said: “My sense is that we have hit that inflection point [for ESG adoption] in the listed equity space; are approaching it in private equity, but are a way off in the hedge funds space.”
At a time when active managers are facing well-documented, yet increasing challenges in the form of low-cost passive managers and greater regulatory scrutiny, there is a growing school of thought that actively managed ESG strategies could in fact be manna from heaven.
When the sector was in its infancy, there were fears that following ESG guidelines would drag down performance. Now the debate is about whether it gives an advantage. According to a study by institutional investment adviser Cambridge Associates released earlier this year, ESG factors have been a big factor in helping emerging markets investors outperform over the past three years.
More recently, a Morningstar study published on November 21 reported that investors who take a sustainable approach do not suffer a performance penalty compared with conventional funds. Jon Hale, Morningstar’s head of sustainability research, said: “The idea that sustainable investing is a recipe for underperformance is a myth.”
Furthermore, issues such as a growing focus on poor corporate governance or the impact of climate change, has caused investors to take this area seriously. Charlie Thomas, head of strategy, environment and sustainability at Jupiter Fund Management, said: “Volkswagen’s ‘dieselgate’ was a significant event which proved that companies struggling to meet environmental legislation trends could expose themselves to meaningful short-term financial damage.”
In April 2015, the German carmaker revealed it had cheated on emissions tests. The shares fell 60% in the next few months and are still far from recovering.
Steffen Hoerter, global head of ESG at Allianz Global Investors, said: “As an active manager we are in the best position to exploit the ESG information and use it to create alpha.” Similarly, Mike Fox, head of sustainable investment at Royal London Asset Management, said: “The more [ESG] screens you have in place and the more you can demonstrate absolute investment performance, the more you can distance yourself from passive funds.”
The doctrine is one that many active managers are optimistic will stand them in good stead over the coming years. Looking ahead, the head of responsibility at Hermes Investment Management, Leon Kamhi, said: “There is a long way to go but we feel we have moved on to the accelerating section of the take-up curve [for ESG strategies].”
Even more radical, Axa Investment Manager’s Christensen is confident that if the current rate of ESG investment growth and integration across asset classes continues, his job as a responsible investment specialist will no longer exist in 10 years’ time.
He added: “The millennial generation is seeking more than just financial returns from their investments and we are seeing this increasingly apply to investors across the spectrum from institutions to private banks and the retail segment.”