Asset managers will find themselves left out in the cold by institutional investors if they fail to take environmental, social and governance (ESG) factors into account, says Willis Towers Watson.
Sustainable investment practices will soon become a "prerequisite" for being hired to manage institutional investment mandates, argues global consultant Willis Towers Watson.
Jane Welsh, a senior investment consultant at the firm, said superannuation fund members are "very switched on" to sustainability.
However, concepts associated with environmental, social and governance (ESG) are by no means "clear cut", Ms Welsh said – something that has prevented investors and asset managers from formulating strategies to date.
"Whatever approach is taken, it needs to be underpinned by effective stewardship of the assets. Through effective voting policies and engagement, asset managers can influence companies to raise their game and manage their businesses more sustainably," she said.
The question of whether a long-term ESG investment approach forgoes current gains for future outcomes remains "controversial".
"Although early studies indicated that the inclusion of ESG factors created slight underperformance, a growing body of evidence suggests their incorporation can help the portfolio match or enhance returns from non-ESG portfolios, but it is not clear cut and often suggests that ‘G’ or governance is the key factor explaining superior results," said Ms Welsh.
"Other studies have suggested that company engagement can lead to superior risk-adjusted returns which again suggests that good governance is a key factor.
"The whole of the investment industry needs to rise to this challenge. Increasingly, clients are demanding it – they are under pressure from their members and from industry bodies, as well as from the increasing body of evidence showing that ESG risks are rising and need to be understood and managed better."
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