Event: Big Call: ESG Investors Forum 2019

The inaugural Big Call: ESG Investors forum took place at One Moorgate Place on 26 November with topics ranging from the definition of the E, S and G, how investors can do good and achieve excess returns and explaining the construction process of the underlying sustainable indices.

Environment, social and governance (ESG) was one of the biggest and most topical themes of 2019 as ETF issuers and index providers globally had been launching products with a sustainable tilt. However, with responsible investing still in its infancy, there have been many teething issues which are yet to be resolved.

One significant issue was the definition of ESG which was discussed in the opening panel consisting of Morningstar’s Hortense Bioy, Patrick Thomas of Canaccord Genuity Wealth Management and EFAMA’s Aleksandra Palinska. An argument made by Bioy was how ESG is very broad and believes the term should not have stuck over the likes of other phrases such as ‘ethical’, ‘responsible’ and ‘sustainable’. The overall consensus was there is a growing demand for clarity around definitions but there is a grey area as to who will take the lead.

Throughout the event, there was a reoccurring question on whether ESG investment strategies offer excess returns. The second panel, with AJ Bell’s Matt Brennan, FactorResearch’s Nicolas Rabener and Rafaelle Lennox of Franklin Templeton, discussed the optimal way to construct an ESG tilted strategy with a multifactor overlay.

Research suggests that ESG products do outperform but there are minimal reports incorporating backtesting which support this. Lennox said Franklin Templeton is regularly contacted by companies in emerging markets wanting to know how they can improve their ESG performance, particularly around its governance.

The construction of ESG ETFs is heavily dependent on the underlying indices which were discussed in the third panel with Truvalue’s Thomas Kuh, Andrew Walsh of UBS and Toby Belson of Principles for Responsible Investing.

Issues within constructing the criteria for ESG indices lie in the creation of ‘ESG leader’ products which become very subjective. There are also analyst biasedness issues as two analysts within any given company might have different opinions on how sustainable a stock is.