It is no longer possible to judge investment opportunities purely on financial terms. There is increasing evidence that so called ‘extra-financial’ factors have a material impact on performance. And, as investors are expected to take more responsibility for the way their choices shape society, risks and opportunities alike need to be assessed differently.
AllianzGI was one of the first investment managers to recognise this, and our Environmental, Social and Governance (ESG) team now has over sixteen years’ experience working as a part of our investment platform.
The question is then, why do ESG factors matter to asset managers?
Modern companies now operate in a world in which negative environmental and social impact, as well as deficient business conduct practices, can significantly impact value across short, medium and long-term time horizons. The demise of Enron, BP’s spill in the Gulf of Mexico and, most recently, Volkswagen’s emissions revelations are just a handful of examples. In contrast, explicitly considering ESG factors in investment analysis offers an effective means to manage risks and identify potentially profitable opportunities, at the same time addressing societal issues of a less tangible nature.
Consequently, the number of asset managers incorporating ESG criteria into their investment decisions has increased dramatically in the past ten years, with growth accelerating even further in the last two. In 2014, there were $6.57 trillion of assets under management (AUM) in ESG-related investment strategies. This is up from $3.7 trillion in 2012 and $1.6 trillion in 2005.
As a company, we have successfully embedded ESG research, ratings and viewpoints into our global research and communication platform, ‘Chatter’. This system enables analysts and portfolio managers to share views on stocks, asset classes and markets globally, and in real time. We have also broadened our research to identify material tail risks of an ESG nature. In the past, these have ranged from stranded assets in the oil sector, to how millennials are forcing companies to change food and drink products.
However, at AllianzGI we also recognise this is only part of the answer. To that end, we actively promote ESG issues through public policy. For example, we engaged with the US Securities and Exchange Commission on carbon risk, led the PRI’s (Principles for Responsible Investment Initiative) dialogue with stock exchanges to promote ESG disclosure by issuers, and participated in the Investment Leaders Group’s research on assessing the risk from investment in carbon-intensive industries. These initiatives work to achieve a sustainable global financial system by enabling ESG factors’ integration into the investment process and encouraging more sustainable and responsible investment practices.
At Allianz Global Investors, we believe in taking action and raising both our and our clients’ understanding beyond financial metrics. Ultimately, viewing investments through an additional ESG lens means that not only will our clients be rewarded with improved investment decisions, but also that they will be contributing towards creating a more stable, sustainable market and society.