Why the ‘S’ in ESG will be crucial and more trends for 2022

1.   Investor interest in sustainable investments is accelerating

Environmental, social, and governance (ESG) issues are a hot topic for investors – and they’re set to become even more important in the years ahead. Schroders’ 2021 Global Investor Study, an annual survey of more than 23,000 global investors, reported substantial growth in investors’ understanding of, and appetite for, ESG-aligned investment opportunities.

In Australia 91%  of investors (94% globally) said they were conscious of sustainable investing, with 56% agreeing (57% globally) they would be willing to move to a sustainable portfolio with the same risk and diversification characteristics as their current investments.

While there can sometimes be a disconnect between what people say and what they do, there are also signs that a growing number of investors are acting to ensure their existing investments are sustainable – or switching to more sustainable options.

2.   COP26 has driven broader climate conversations

Unsurprisingly, climate change is a key focus for investors, driven by the conversations coming out of COP26. Not only will this theme continue in 2022, we’re also likely to see it expand to include broader issues like the effects of climate change on biodiversity, and the role investors can play in forestalling those impacts.

Alongside a keen focus on nature, including critical issues like preserving the world’s forests, fund managers and investors will turn their attention to exploring options that make a positive impact on the environment, not just limiting harm.

3.   Social issues are on the radar

Investors are also increasingly aware of the ‘S’ in ESG, with many asking how they can direct their capital toward building more resilient communities, reducing inequality and fostering positive social outcomes.

In our 2021 Global Investor Study, more than 52% of Australian investors (57% globally) said that social issues had become more important to them during the pandemic, with more than one in five saying those issues had become much more important.

For advisers and investment managers seeking to attract and retain the investors of tomorrow, that makes it all the more essential to offer investment opportunities aligned with their clients’ social values, not just their financial objectives.

4.   Institutional investors and businesses are driving change

In response to the growing investor demand for genuinely sustainable options, investors and businesses are increasingly working together to demonstrate and improve their ESG performance.

At Schroders, we’ve integrated ESG criteria across our entire business. We ask all of our investment teams to provide evidence of their approach to sustainability, including key metrics and case studies, demonstrating the robustness of the ESG frameworks they’ve built into the investment process.

This isn’t a new conversation for us – our Australian equities team has been incorporating ESG into its valuation methodology for many years. What is new is the level of engagement we’re experiencing from businesses eager to showcase their ESG credentials. That provides us with new opportunities to engage companies and help influence positive changes that also drive positive outcomes for our clients.

To take just one example, the CEO of BHP recently had a personal meeting with our Global Head of Sustainable Investment, Andy Howard, to talk through their climate initiatives. They talked about how the company was going to approach net-zero and the projects they have put in place to deal with the very real issue of climate change.

That meeting is a testament to our ability as an active investor to enact change and positively influence companies toward more positive outcomes. It’s something that couldn’t happen if investors and advisers weren’t actively choosing to invest in ways that make a difference.

5.   Advisers have a key role to play

With investors increasingly focused on sustainability, advisers have a key role to play in helping them select opportunities that are genuinely aligned with both their financial goals and their ESG principles. That task has become more difficult at a time when many businesses and product providers are eager to promote their sustainability credentials – deserved or otherwise. For example, simply being a signatory to the UN Principles for Responsible Investment (UNPRI) is unfortunately not a guarantee that an investment manager will satisfy clients’ desire for truly sustainable investments.

Advisers can help by asking some key questions, including:

• Does the investment manager systematically incorporate ESG factors into their investment process?
• If so, how do they do so? What evidence can they provide?
• Do they have in-house ESG expertise, or do they outsource their ESG analysis to third-party data providers?
• How are they engaging with businesses and private markets to drive better ESG outcomes?
• How are their ESG criteria integrated with their investment frameworks to create sustainable financial performance?

Read more about how financial advisers can approach ESG conversations in our guide.

There is a lot of information available to investors so it’s important to help them understand the role they play in directing capital toward more sustainable options or products – or in ways that have a more positive impact.

Read more about how Schroders is looking Beyond Profit and making an impact through sustainability.