Grasping the growing momentum of ESG
Are you ready to help your clients navigate their responsible investing options?
Responsible investing has been attracting attention for many years, and recent events are likely accelerating the trend. Record-breaking heat waves and devastating forest fires and floods have intensified public focus on climate change. Meanwhile, the COVID-19 pandemic has increased awareness of how businesses protect the health and safety of employees and the community, and how they govern such facilities as long-term care homes.
However, a recent U.S. study found that many investors are relying more on instinct than on research when evaluating potential investments for environmental, social and governance (ESG) criteria. When Investopedia and Treehugger asked investors how they decide whether or not a potential investment aligns with ESG, just 37 per cent said, “it’s in a mutual fund or exchange-traded fund that is ESG-focused,” 37 per cent said, “it ranks highly in ESG stock screeners” and 25 per cent said, “the company has won awards for its ESG efforts” – all ways to externally validate ESG credentials. A much higher number (55 per cent) relied on a general sense that the company is “more ethically conscious or environmentally friendly” than others in its industry.
To supplement their moderate understanding of ESG, investors are turning to advisors to help them sort out their options. From a niche marketing perspective, this presents an opportunity to make responsible investing an important part of your practice. Along with educating clients about responsible investing, advisors need to know which solutions to pull off their product shelves to match their clients’ preferences. Becoming more familiar with the available choices will make it easier to reach for the most appropriate solution every time.
Building ESG into the investment process
Responsible investing is rooted in socially responsible investing (SRI), which excludes certain industries – for example, alcohol, tobacco, gambling and weaponry. But today, the term can describe a variety of approaches.
ESG integration, one of the most prominent strategies, moves responsible investing from exclusion to inclusion, in that companies with a strong ESG record are favoured and included in investment portfolios. Embraced by an increasing number of investment managers, ESG integration evaluates material ESG factors as an essential part of the investment process. This includes examining:
- How a company’s operations affect the natural environment, and how the natural environment affects the company (E)
- The relationship between a company and its employees, suppliers and communities (S)
- The structures or systems a company has put in place to ensure effective direction and control (G)
This analysis allows asset managers to consider additional risks to an investment’s potential performance – risks that may not have been fully accounted for before – which can help improve the risk-adjusted performance of a portfolio.
Many asset managers pair ESG integration with a related strategy known as active ownership. Active ownership may include in-depth conversations between asset managers and a company’s management team to understand the reasoning behind certain decisions. Such conversations also provide the opportunity to offer constructive recommendations for improvement in areas such as executive compensation – important to good governance. In addition, active ownership may include strategic proxy voting to help steer a company towards better long-term ESG-related decisions.
Thematic investing focuses on megatrends that often overlap with ESG
A different take on responsible investing is thematic investing, which focuses on identifying investable themes underpinned by “megatrends.” These are the powerful social, demographic, environmental and technological forces of change that are revolutionizing some of the ways we live and reshaping our world.
Many megatrends support businesses that are operating with a good ESG framework. For example, an emphasis on sustainability tends to reward companies across all industries that seek to meet current needs without compromising the ability of future generations to meet theirs. Similarly, a focus on health favours organizations in industries such as biotech and nutrition that are striving to improve global quality of life. Some businesses are at the intersection of several megatrends, and these often represent the most compelling thematic investing opportunities.
A relatively new area of concentration for thematic investing is on services that enable people to live more fulfilling lives. This human-focused theme pursues opportunities in consumer services that support people as they learn, care for each other and enjoy life. The theme may translate into investments in companies involved in education, educational technology, recruitment, dating, fertility, home health, fitness, retirement, funeral services, travel, dining and cultural experiences. This theme is all about supporting healthier, longer lives with better mental and physical well-being, and complements other ESG investing strategies.
Manulife recently launched another thematic fund that could be of interest to your clients. The Manulife Climate Action Fund invests in companies it believes have clear plans to benefit the environment and help achieve the targets outlined in the Paris Agreement, by reducing their carbon footprint.
Your clients can also participate in thematic investing through the Manulife Global Thematic Opportunities Fund. This diversified investment solution is the result of our partnership with Pictet Asset Management, a thematic investing pioneer with more than two decades of experience. It’s a high-conviction, unconstrained fund that lets the portfolio managers’ expertise shine.
Investors who express an interest in ESG often wish to direct their money towards investments that contribute to a positive, common future. Incorporating thematic investing into their portfolios can help them achieve this goal while also enjoying potential growth from investments that are well positioned to benefit from important long-term global trends.
Take the lead and be future-ready
Advisors can’t rely on clients to raise the subject of ESG, even though they may be quietly thinking about it, because many likely don’t feel confident in their own understanding of evolving investing opportunities. However, advisors can demonstrate they share clients’ concerns about ESG-related issues by proactively raising the topic.
Explaining strategies such as ESG integration and thematic investing can help clients understand the various ways they can participate in rewarding businesses that contribute to global sustainable progress. Then you can point to specific solutions on your product shelf that sit within these categories.
ESG is an integral element of portfolio management across the Manulife Investment Management platform. ESG integration at Manulife is supported by the expertise of a global ESG team with experienced analysts in North America, Europe and Asia, and by a commitment to independently unpack ESG data so each investment approach can incorporate what is truly material to its returns.*
In 2020, Manulife Investment Management received a top rating of A+ from the UN Principles for Responsible Investment (PRI) for ESG strategy and governance, and integration in listed equity and in sovereign, supranational and agency bonds. It was also one of only 20 investment managers worldwide appointed to the PRI 2020 Leaders Group — and the only Canadian investment manager in the group.
Partnering with Manulife to satisfy your clients’ desire to invest responsibly can enable you to meet your clients’ goals while building a future-ready reputation. Through your clients’ investment choices, you may even be contributing towards better environmental, social and governance practices capable of improving the world in both the near and long term.
*Manulife Investment Management considers that the integration of sustainability risks in the decision-making process is an important element in determining long-term performance outcomes and is an effective risk mitigation technique. Our approach to sustainability provides a flexible framework that supports implementation across different asset classes and investment teams. While we believe that sustainable investing will lead to better long-term investment outcomes, there is no guarantee that sustainable investing will ensure better returns in the longer term. In particular, by limiting the range of investable assets through the exclusionary framework, positive screening and thematic investment, we may forego the opportunity to invest in an investment which we otherwise believe likely to outperform over time.
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