Practical analysis for investment professionals
19 June 2014

ESG Issues in Investing: What, Why, and Why Not (Online Forum)

Whether it’s BP, Lonmin, or Enron, many large companies have hit the headlines for the wrong reasons — and frequently for things that have gone horribly wrong with environmental, social, and governance (ESG) issues. ESG in investing covers a variety of issues, including alternative energy, water, waste, biodiversity, forestry, transportation, health care, human rights, child labor, employee relations, and executive compensation. It is not only about large companies getting things wrong but also about very long-term changes taking place in the world, with climate change being most familiar.

Investors examine these issues for different reasons — ranging from purely economic motives, such as more comprehensive identification of an investment’s risks, to purely moral reasons, such as ensuring they do not become party to actions they find morally objectionable. There are ongoing debates about why ESG issues are important and to what extent they should be given due consideration in traditional investing. Whatever your opinion is of ESG, there is no denying that some of its central issues, such as climate change, are receiving increasing attention from investors.

To gain clarity on the debate about ESG issues in investing, CFA Institute is hosting an online forum 27 June under its Future of Finance initiative, which is a global effort to shape a trustworthy, forward-thinking financial industry that better serves society. Our distinguished panel will include: Jeroen Bos, CFA; Andrew Canter, CFA; Amy Domini, CFA; Raj Thamotheram; and Roger Urwin.

The discussion will be held on 27 June 2014. If you’d like to share your perspective or pose a question to our panelists, scroll to the bottom of this post and leave a comment, or send a tweet to @Usman_Hayat. We’ll do our best to incorporate your thoughts into our discussion.

Keep your browser open to this post on 27 June 2014 as the discussion will unfold live in the window immediately below.

Join the Forum

Jeroen Bos, CFA

Bos is the head of global equity research at ING Investment Management and member of the board of directors of the CFA Society Netherlands. In recent years, Bos has been working on improving the integration of ESG factors into the equity research process with a goal to improve the risk-return profile of the equity investments the firm makes. He will be joining us from the Netherlands.

Andrew Canter, CFA

Canter is the chief investment officer of Futuregrowth, a specialist investment company that manages its investments “in an ethical and sustainable way.”

Amy Domini, CFA

Domini is the founder and CEO of Domini Social Investments, LLC, which was established in 1991. She is the author of Socially Responsible Investing: Making a Difference and Making Money.

Raj Thamotheram

Thamotheram is a strategic adviser on long-term wealth creation and the management of “preventable surprises.” He is CEO of Preventable Surprises, president emeritus of the Network for Sustainable Financial Markets, and a visiting fellow at the Smith School (Oxford University).

Roger Urwin

Urwin is the global head of investment content at Towers Watson. He is involved with the Towers Watson thought leadership group (Thinking Ahead Group) and is the author of a number of papers on asset allocation policy, manager selection, and governance. He also serves on the CFA Institute Board of Governors and an advisory director to MSCI Inc.

Questions to Discuss 

  1. What is the case for considering ESG issues in investments? To what extent does traditional investing not consider ESG issues, and why?
  2. Are ESG issues only about economic value, or are they also about morals and values?
  3. What’s your view on the debate on fiduciary responsibility and the financial performance of investments that consider ESG issues?
  4. What’s the track record of ESG research in identifying long-term risks ahead of time (e.g., BP, Lonmin)? If ESG research can’t identify such risks, what’s the ESG economic value proposition?
  5. Companies that are likely to be seen as controversial from an ESG/sustainability perspective (e.g., manufactures of tobacco) are also publishing sustainability reports. Is there a credible and shared understanding of what is meant by “sustainability” in investing?
  6. How relevant are ESG considerations in asset classes other than equities?
  7. What organizational arrangements does an institutional investor need to put into place to consider ESG issues effectively?
  8. What differences could one expect in the real world if every investor started considering ESG issues in investing?

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

About the Author(s)
Usman Hayat, CFA

Usman Hayat writes about sustainable, responsible, and impact investing and Islamic finance. He is the lead author of "Environmental, Social, and Governance Issues in Investing: A Guide for Investment Professionals", and the literature review, "Islamic Finance: Ethics, Concepts, Practice." He is interested in online learning and has directed three e-courses for CFA Institute: "ESG-100", "Islamic Finance Quiz", and "Residual Income Equity Valuation." The other topics he writes about are macro-economics and behavioral finance. Previously, he was a content director at CFA Institute. He has experience of working in securities regulation and as an independent consultant. His qualifications include the CFA Charter, the FRM designation, an MBA, and an MA in Development Economics. His personal interests are reading and hiking.

12 thoughts on “ESG Issues in Investing: What, Why, and Why Not (Online Forum)”

  1. Thomas Krouse says:

    The European Parliament of the European Union has recently adopted a new directive requiring that companies with over 500 employees disclose on the non-financial and diversity information. The scope of companies is approximately 6,000. Companies may use international, European or national guidelines which they consider appropriate (for instance, the UN Global Compact, ISO 26000, or the German Sustainability Code).

    1. Will mandatory ESG reporting from these firms increase their competitiveness and earnings in the global economy?

    2. If so, will this incentivize American firms to do the same?

    1. Thomas Krouse,

      Thanks for visiting Enterprising Investor and asking these two questions. I will try to include these questions in our discussion.

      Regards

      Usman

      1. ESG has become yet another adjective before the work ‘investing.’ But methodologically, what is it? Most discussions suggest that it is an extended form of screening on past performance. But we know about past performance from our investment offerings. It must be future-oriented, risk-adjusted and opportunity directed as part of financial analysis if it is to capture the so-called intangibles.

  2. ESG has become yet another adjective before the work ‘investing.’ But methodologically, what is it? Most discussions suggest that it is an extended form of screening on past performance. But we know about past performance from our investment offerings. It must be future-oriented, risk-adjusted and opportunity directed as part of financial analysis if it is to capture the so-called intangibles.

    1. Stephen Viederman,

      Thanks for sharing your thoughts. I am not sure what exactly is your question. Are you asking: Does ESG analysis has to be future-oriented, risk-adjusted and opportunity directed to deliver out-performance?

      Regards

      Usman

  3. Kaori Nomura says:

    From my understanding, it is the primary reason for investors to incorporate in ESG that ESG is the risk and opportunity and may improve the long term investment performance.

    Second, but from more important aspect in the global trend, is the investors’ social responsibility to contribute to pursue social benefit or to share the cost of global externalities through profit making activities.

    My question is related to the latter mentioned above, and also related to the discussion point #5 & #8.

    5. … Is there credible and shared understanding of what is meant by “sustainability” in investing?
    8. What differences could one expect in the real world ….

    I would like to know the latest research, if any, about how social impact ($) of ESG investments is/can be measured.

    Thank you.

    1. Kaori Nomura,

      Thanks for sharing your questions. I hope you will be able to find some answers to these questions in our discussion.

  4. Matt says:

    I have a couple of questions:

    1. To what extent do you think government regulation and policy influence the capacity for ESG investing to generate alpha? That is, will early adopters of sustainability programs outperform their less proactive counterparts primarily due to minimizing the costs of forthcoming regulation, or are there other reasons to believe they will outperform?

    2. There are now multiple indices incorporating ESG issues. Dow Jones, MSCI, FTSE4good, Calvert Social Index, etc. Is there any information sharing happening to create a more unified index that overweights corporations with best practices and underweighting those that are lagging? Are there major differences between these indicies?

    1. Thanks a lot for sharing your questions Matt.

      I will certainly try to cover your questions in our discussion.

  5. Mike Tyrrell says:

    I would like to pick up on the point that Jeroen made that “firms that do “full” ESG integration in its overall research and investment process are in the minority.”

    I agree with him but am continually frustrated by asset managers who, in my view devalue the term ‘integrate’ by applying it to all manner of post-trade analytics and quantitative back-testing.

    How can definitions and then market mechanisms be developed that differentiate between:
    * fundamental, bottom-up, stock-by-stock / sector-by-sector adjustments to ‘fair values’ / ‘target prices’ based on the application of sustainability and corporate governance information (what I believe to be ‘integration’) to valuation models and…
    * all of the other ways that sustainability and corporate governance information is applied to investment processes (e.g. ratings, engagement strategies, proxy voting, screening etc.) – all valid strategies but not ‘integration’

    1. Mike Tyrrell,

      Thanks for your question. I’d soon be attempting to include questions posed by our viewers. We may not be able to cover all questions posed by viewers, but I am certainly going to try to cover as many as I can.

      Regards

      Usman

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