ESG Investing Environment; How Is It Different than SRI?
Today we sat down with Sebastian Rollen, a senior investing researcher in the quant investing team at Betterment.
To give you a quick background on Seb, he’s been at Betterment for two years after working in private equity for a few years in London. A self-described “data nerd”, he wanted more investment data when he landed his current job.
As part of the quant investing team, his daily role is to define and implement research strategies on what the Betterment portfolio should look like. Betterment has core principles (such as low costs are better than high cost, global diversification). Under that, his team comes in and decides how to invest under that umbrella. In terms of socially responsible investing (SRI), it’s also up to his team to decide what to invest in there.
ESG / SRI environment
To get everyone on the same page, ESG stands for Environmental, Social, and Governance, which are three pillars used to measure the sustainability and societal impact of a company. SRI stands for socially responsible investing. Interestingly, at Betterment, their SRI portfolio is the second biggest after their core strategy portfolio, and it is growing quicker than the rest of the company. This shows investors are interested in having an impact with their investments.
This year has been dubbed the “year of ESG investing”. While there was a 15% dip in the overall markets, flows into ESG funds were strong. Since the beginning of this year, even throughout the covid-19 crisis, there wasn’t a single day where people withdrew money from ESG funds, compared to other funds on average, where people have pulled out.
Even during the pandemic no one is taking money out of ESGs compared to other ETFs [1].
Source: Financial Times
See the large dip in the red line? That’s investors withdrawing money out of typical ETFs. The blue line, on the other hand, continues to rise steadily throughout the year. ESG investors aren’t stressed. It shows people care.
There are financial incentives for ESG investors
A 2017 study by Nordea Equity Research (the largest financial services firm in the Nordics) found that from 2012 to 2015, companies with the highest ESG ratings outperformed lowest-rated firms by as much as 40% [2]. Similarly, a study by Harvard Business School reported companies with processes to measure and manage ESG performance in the early 1990s outperformed a “carefully matched” control group over a 18 year period [3].
So what’s holding back ESG investing?
Given the financial payoffs and recent trend in ESG investing, what’s keeping it from exploding? The largest obstacle remains transparency. Most sustainability reporting are aimed at NGOs or other stakeholders, not investors, and are not vetted to a standardized assessment scheme. While the quality and information availability is still lacking, substantial progress is being made. Consumer engagement and companies like finuprise prove that the ESG investing landscape is rapidly improving.
[1] Brief definition of ETF: “An exchange-traded fund (ETF) is a type of security that involves a collection of securities and is traded on stock exchanges. ETFs can contain many types of investments, including stocks, commodities, bonds, or a mixture of investment types” | Source: https://www.investopedia.com/terms/e/etf.asp [2] & [3] Eccles, R. & Klimenko, S. May-June 2019 Issue of HBR. The Investor Revolution. Accessed 15.4.20 from https://hbr.org/2019/05/the-investor-revolution