Global Head of Traditional Investments
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The universe of ESG investments is growing fast - and so is the need for rigorous analysis of investment managers' processes.
Does your investment manager really share - and live - your deeply held personal values? For any investor wishing to pursue environmental, social, and governance (ESG) goals alongside investment objectives, this is a vital question. Unless a manager is rigorous in applying ESG principles, a number of risks can arise. Your investments may fail to contribute to the positive societal changes that you wish to see. Indeed, they may even help to hinder the achievement of such benefits. Over time, it is possible that your financial returns also suffer.
In recent years, the number of managers identifying themselves with the core principles of ESG investment and offering related strategies has risen rapidly. As of January 2019, for example, some 1,600 investment managers had signed up to the United Nations' Principles for Responsible Investments (UNPRI), up from less than 100 in 2006. The UNPRI commit signatories to following six broad principles. These include incorporating ESG principles into their analysis and decision-making, seeking disclosure of ESG issues from the firms they invest in, and reporting their progress.
While we certainly see signing up to the UNPRI as desirable, it is far from the only thing we think that you should look for in an ESG investment manager. Some investment managers may only become signatories because they believe that doing so will enhance their brand or reputation. And, while some others may sincerely believe that their investment approach is aligned to the UNPRI, that may not actually be the case. Put simply, you need to verify that an investment manager does not simply 'talk the talk' but also 'walks the walk'.
Performing such verification, however, is far from straightforward. The large and ever-growing number of investment managers who tout ESG credentials is only one part of the challenge here. Managers frequently implement ESG methodology into their processes in different ways, and for good reasons. Their approaches often vary according to the asset class, investment style, and size of securities they target. As a result, it is hard to apply a one-sized-fits-all when assessing their incorporation of ESG principles. Substantial expertise time, and resources are all thus essential to verification.
Investing with Purpose (IwP) is Citi Private Bank's approach to helping align clients' portfolios and their personal values. As part of this, our dedicated Investment Management Research team systematically seeks out third-party equity and fixed income managers who genuinely integrate ESG factors into their investment processes. Our specialists undertake detailed quantitative manager assessments, which help to reconcile the often very different and conflicting ESG ratings available. They then use qualitative analysis to deepen understanding futher.
Besides seeking societal benefits, we believe that integrating ESG factors into the investment process can potentially enhance returns and mitigate risk over the long term. We expect growing recognition of these potential benefits to lead to further increases in the number of managers subscribing to ESG principles and offering ESG strategies. As the manager universe grows, so will the need for scrutiny. Increasing availability does not automatically translate into increasing quality.
To read more about Investing with Purpose, click here.