As the world continues to rebound from the COVID-19 pandemic, the recovery trade is playing out in real time, presenting shifting patterns of opportunity and risk. Our view is that this unique landscape will eventually transform into a more familiar one: a lower-return world subject to downside risks that threaten to derail carefully laid investment plans.
This challenge calls for creating portfolios that can deliver a more favorable return sequence that better positions investors to pursue their long-term goals, including stable growth and efficient income. One goal growing in popularity is purpose: ensuring investments exhibit good environmental, social and governance (ESG) behaviors—and even targeting investments to advance ESG-aligned causes. Since 2015, ESG equity funds have seen cumulative inflows of US$256 billion, while non-ESG active equity funds have seen outflows of US$2.6 trillion, based on Emerging Portfolio Fund Research Global and Bernstein Research data.
Why ESG Integration Is Critical
Because ESG considerations and management quality are so tightly interwoven with financial considerations, it’s challenging to invest responsibly through large-scale blanket exclusions of issuers or segments, or through a passive screening based on quantitative metrics. ESG considerations are, in fact, financial considerations and can often emerge quickly. So, as we see it, they must be integrated with traditional fundamental analysis.
A case in point is a company that’s a heavy carbon emitter, bringing exposure to costly carbon taxes and possibly higher operating costs from legally mandated equipment upgrades. It’s a mistake, in our view, to approach the financial and ESG ramifications independently. So, whether investors are analyzing an issuer for a large-cap growth or high-yield bond strategy, ESG can’t be treated separately from the investment process—and must be informed by direct engagement with issuers.
Beyond ESG Integration to Purpose-Driven Solutions
More and more investors are moving beyond issuer-level ESG integration to purpose-driven solutions. These strategies offer diverse ways to access equity beta, with choices of markets and approaches to refining universes in alignment with specific purposes. Sustainable strategies, which seek to invest in issuers that can meet present needs without compromising future well-being, are one such solution.
One way to tackle the sustainability aspect is pursuing durable growth through issuers whose products and services align with long-term themes, such as the United Nations Sustainable Development Goals. The SDGs (Display), introduced in 2015, are an aspirational view of what the world could look like by 2030, and they consider the role the private sector must play to get there.
