Irish Association of Investment Managers

The Better Investor: Why, Despite a World in Flux, People Still Want to Invest in Firms Doing the Right Thing

It is little wonder that people remain confused about the concept of Environmental, Social, and Governance (ESG), or responsible investing.

A recent report, Your Planet, Your Future, from asset managers Amundi Ireland, revealed that most Irish savers—89%—do not know what ESG stands for.

Furthermore, most are unsure what the term "responsible investing" means, often associating it with investing cautiously rather than investing in endeavours that aim to do right by people and the planet.

These gaps in knowledge exist even though Irish savers also say they want to be able to invest in greener products. In fact, 86% of those surveyed about pensions, investments, or savings products said they considered ESG important.

Notably, half of the 1,000 people surveyed said they would be willing to sacrifice up to 10% of their return on investment to help the planet and avert the climate crisis.

Essentially, ESG is a collective term for a business’s impact on the environment and society, and how robust and transparent it is when it comes to corporate governance—in other words, how it operates and treats its staff and stakeholders.

Clearly, as an industry, investment managers need to do much more when communicating to investors.

Existing Confusion Compounded by Recent Events

This existing confusion around responsible investing is likely compounded by recent news that nearly a quarter of funds claiming sustainability credentials under the Sustainable Finance Disclosure Regulation (SFDR) are not living up to ESG investing principles and do not warrant the EU’s Article 8 "green" classification.

Effective from March 2021, the SFDR requires financial market participants—such as asset managers and financial advisers—to provide investors with ESG-related information about financial products, enabling them to make informed investment decisions based on ESG factors.

Under this regulation, financial products are categorised into three groups:

Article 6 – Products with no sustainability drivers.
Article 9 – The most ESG-friendly products, with specific ESG objectives, investing solely in sustainable investments. These are considered "dark green" due to their core sustainability focus.
Article 8 – Products that promote environmental or social characteristics, or both, falling between Articles 6 and 9.

However, recent research from Morningstar revealed that 23% of funds classified as Article 8 were deemed unworthy of the classification. Additionally, several Article 9 funds were reclassified or "downgraded" to Article 8.

Compounding this confusion is the persistent problem of gathering accurate and real-time data to make ESG investment decisions.

Data Can Be Subjective

Data lies at the core of ESG investing, but it is currently imperfect. A recent Accenture report identified that one of the most significant barriers to ESG integration is the lack of quality, consistency, and reliability in ESG-related data disclosure, along with coverage and data gaps.

There are only about 30 data vendors with experience in this area, and of these, only a small number provide global coverage.

While more companies are entering this space, issues with their data quality and coverage remain significant for asset managers and investors.

Even Sustainalytics, one of the leading data vendors, believes sustainable investment calculations under current EU regulations "remain perplexing for ESG investors."

A Glimmer of Good News

There is, however, some good news for investors.

SFDR is a first-of-its-kind regulation introduced to make it easier for investors to compare ESG products across the market. Like many trailblazing initiatives, it is not without challenges and will take time to fully settle.

The regulation was primarily designed to tackle "greenwashing"—a term for misleading environmental claims that overstate the ESG or sustainability-related aspects of a financial product or company. Greenwashing can be intentional or unintentional, but the outcome is the same: investors are misled.

Greenwashing can take many forms, such as selective disclosure, vague statements, or unsubstantiated claims.

In effect, the current wave of fund reclassifications and increased scrutiny is weeding out inappropriately labeled ESG funds, which is a positive step for the industry.

ESG Funds Perform Better Over Time

It is now broadly accepted that companies with strong ESG practices outperform others in the stock market over the long term. Sustainability information is increasingly relevant for understanding corporate performance and investment returns.

Research from McKinsey, analysing 2,000 academic studies, found that 70% demonstrated a positive relationship between strong ESG performance and financial returns. Similarly, a report from ESMA revealed that over a 10-year period ending in 2020, funds with an ESG strategy—including equity, bond, and mixed funds—outperformed their non-ESG peers.

Bloomberg Intelligence estimates that global ESG assets are on track to exceed $53 trillion by 2025, representing more than a third of the projected $140.5 trillion in total assets under management.

This projection has now been revised upwards, with ESG assets expected to reach $41 trillion this year. (ESG assets surpassed $35 trillion in 2020, up from $30.6 trillion in 2018, and $22.8 trillion in 2016.)

The trend is clear: people want to invest in companies doing the right thing—despite concerns about global recessions, rising interest rates, the war in Ukraine, inflationary pressures, and surging energy prices.

The Role of Investment Managers

This makes it more critical than ever for the investment management industry to clearly articulate the challenges and opportunities of ESG investing.

The investment managers here in Ireland are serving people both at home and globally. Total assets in Irish pension funds invested on behalf of Irish citizens, combined with savings in banks and credit unions from Irish households, account for €273 billion of the total €4 trillion in investment funds domiciled in Ireland.