Ethical, Social and Corporate Governance and the Future of Responsible Investing
Investments adhering to the ethical principles surrounding Environment, Social and Corporate Governance (ESGs) are booming. In 2016 a staggering $22.9 trillion worth of investments were made associated with the principles of socially responsible investment, with the amount only forecast to grow.1 This growth is happening concurrently with the largest wealth transfer in history as $30 trillion is being shifted from baby boomers to their progeny.
The rise of millennials into positions of leadership, their increasing levels of inheritance and their strong social values are shaping the way professional investors are targeting their clients. With a 135% increase in assets under management in ESGs between 2012 and 20162, it is evident that socially responsible investing is not only gaining substantial momentum but is here to stay.
While responsible investing has historically focused on refraining from investing in oil, tobacco, and weapons its recent manifestation is more holistically centred on creating positive social value - as well as a healthy return on investment. The United Nations' Principles for Responsible Investing (PRI) were established in 2006 to guide institutional investing practices and set out six non-binding principles to guide investors through their entire investment cycle; MUFG was among one of the first signatories of this initiative and is an active member of the PRI community.
In addition to the UN PRI, the signing of the UN Sustainable Development Goals (SDG) in 2015 has signalled a renewed pledge to create a sustainable future for the planet and its citizens. At the core of the SDGs are 17 goals associated with increasing the livelihood of the poorest and ensuring the planet is used in a sustainable fashion. The signatories of the SDGs have put in place an ambitious timeframe to see the goals achieved by 2030, it is only through incorporating philosophies such as responsible investing that these goals will become achievable. MUFG is leading the way in making sure it does its part in contributing to the progression of the SDGs.
Socially Responsible Investing (SRI) is defined as an all-inclusive approach to incorporate ESG factors into every investment decision. It is often incorrectly associated with impact or ethical investing, which is a much more focused and targeted investment strategy. It is this holistic endeavour, however, that leads to uncertainty regarding how SRI should be defined, reported and quantified.
Although ESG investment is quickly becoming mainstream and has a substantial amount of investment, there are yet to be concrete, industry-wide, definitions on the standards surrounding ESG investment. Different funds and metrics exist to measure ESG, such as the FTSE4Good Index, but it is largely the prerogative of companies and investors themselves to determine what constitutes an ESG investment. This uncertainty, unfortunately, leaves open the possibility for abuse and inconsistent reporting.
Currently, the three biggest types of sustainable investment are negative/exclusionary screening, ESG integration and corporate engagement/shareholder action, respectively. As of 2016 53% of professionally managed assets in Europe now use responsible investment strategies.4
In addition to these investments in Europe, a study of institutional investors5 revealed that 95% of respondents plan to engage with the companies they invest in regarding ESG principles; this market research is indicative of the strong position MUFG is in as an industry leader when it comes to ESG engagement. As an indication of MUFG's strong market position, Bloomberg's 2017 New Energy Finance report placed MUFG as the number one finance lead arranger for renewable energy; MUFG financed 63 clean-energy and energy-smart technology projects worth $4.3 billion.
With the increase in investments seen at MUFG, it appears that the appetite for SRI in Japan is inspiring. The largest pension fund in the world, the Japanese Government's Pension Investment Fund (GPIF), has stated, as of 2017, that they will dedicate 10% of their domestic holdings, or $29 billion, to investments that adhere to ESG in indices such as the newly created FTSE Blossom Japan Index and the Japan ESG Leaders Index.6
Driving Social Change
Japan's preparations for the Tokyo 2020 Olympic and Paralympic Games, as well as the 2019 Rugby World Cup, are well underway. MUFG is anticipating that the opening ceremonies will herald both the start of the sporting spectacle and the apogee of a reinvigorated Japanese economy. MUFG is committing itself to promoting its investments in renewable energy as well as its partnership with organisations to generate further social good. As firms rally to increase their corporate ESG reputations, MUFG is taking a lead with a global partnership with Laureus Sport for Good Foundation.
Through MUFG's partnership with Laureus, MUFG is helping to increase the global presence of Laureus Sport for Good Foundation to increase participation in its programs and further collaborate with organisations who use sports to facilitate social change. The partnership with Laureus is one of the avenues in which MUFG is demonstrating its dedication to engaging with ESG principles.
The Future of Returns on ESG Investment
For many, the question remains whether ESG-focused investments mean a sacrifice to profits.
New analysis has revealed that investors' concern about the return on ESG investments are misplaced as the FTSE4Good UK index returned 60.31% over five years compared with the FTSE100's 50.85%; similar trends have been seen in the US with the KLD400, the main ethical benchmark, returning 109.19% over the last 10 years compared with the S&P 500's 107.65%.7
Drawing on its vast experience as a pioneer in ESG-based assessment, evaluation and asset management, MUFG's Trust Bank is focused on creating and managing funds with a sustainable growth targets - including managing a Japanese equity strategy which aims to outperform the Japanese equity market using MUFG's proprietary ESG analysis. Similarly, the group actively engages with businesses they invest in to guide and convince them to further entrench their values with those that align with ESGs principles.
In the future, with the growing level of investment in ESG focused companies, a compounding factor will be the need for companies to address their shortfalls, so they meet the criteria for ESG indices, which in turn will nudge the market in a more socially responsible direction.
It seems, with these objectives, returns and the growing future of SRI, investors will be able to save the world and eat their cake too.
- Global Sustainable Investment Review 2016
- Sustainable Investing Myth Busters (Morgan Stanley)
- Green Generation: Millennials Say Sustainability Is a Shopping Priority (Nielsen)
- Global Sustainable Investment Review 2016
- Conducted by ShareAction
- Japan's GPIF expects to raise ESG allocations to 10 percent: FTSE Russell CEO (Reuters)
- Fit for the future: how ethical investing went mainstream (Money Week)
Investing in the Future