In ten years' time, 'everything will be ESG' says Nicco Ferrarini, Executive Director, EMEA Client Coverage at MSCI.
That's in spite of the fact that Environmental, Social and Governance investing is only 'a niche space' in the ETF world right now. Ferrarini made his comments at this week's 'Inside ETF' conference in London, and he justified his stance on the grounds that 'there's mounting evidence that ESG can improve performance.'
So if Ferrarini is right, ESG investors can benefit from strong performance whilst helping to make the world a better place for future generations.
ESG's boost to performance may come from the Governance element of investment theme. Ferrarini pointed out that several big corporate scandals were linked to poor corporate governance including Volkswagen, BP, Equifax and Wells Fargo. He also said that millennials are 50% more likely to have ESG investments in their portfolio, so as that age group becomes more wealthy, demand for ESG investing strategies should rise.
On top of that, Ferrarini reported that his clients want 'ESG plus factor…the most sophisticated investors are looking for the best of both worlds.' Some of the clients want to start with ESG and then layer factors on top, others want to do it the other way round.
Definition
Ferrarini wasn't the only participant at the conference to highlight ESG. Matthieu Guignard, Head of Product Development & Capital Markets at Amundi, said 'the challenge for ESG is to define standards.' Different investors and different cultures prioritise different parts of the approach.
Hortense Bjoy, Director of Passive Funds Research at Morningstar, agreed that ESG would grow, but would do so alongside other thematic investment approaches. So investors may use it as part of a core/satellite investment approach. As ESG is an area with lots of growth potential, we may see newer entrants into the ETF market focus their efforts on ESG and other themes. It's probably too late for new or recent entrants to get much traction with FTSE 100 or S&P 500 ETFs.
Myths
Meanwhile Dan Lefkovitz, Index strategist at Morningstar, set out to puncture some myths around sustainable investing and ESG investment indices.
He argued that ESG investing has moved on from just excluding stocks from a portfolio - examples of likely excluded stocks include arms manufacturers and tobacco companies. Morningstar now focuses on 'ESG integration', looking for good scores on all of the three ESG factors when picking and weighting stocks for an ESG index.
He also emphasised sustainable investing doesn't inevitably correspond with poor returns. Morningstar research shows that, by and large, stocks that peform well on sustainability screens also get a better than average overall Morningstar rating. Indeed ESG stocks tend to come out well when you look at other investment factors especially Quality and Minimum Volatility.
