This year may ring the bell on a fundamental rethink for investors. Underlying all the major trends we identified for 2017 is a strategic decision point – do we change the way we think about investing, or is this business as usual in a new order?
In either case, one thing seems certain – focusing on policy shifts alone would be shortsighted. Policy is an outcome, forged by forces that unfold over more than one election cycle and reflect deeper technological, socio-demographic and energy trends that are reshuffling the social order and the investment landscape. This year, we need to think big – how will major trends affect the capital markets for the next decade? Here are the biggest ESG forces affecting institutional investors over the long haul.
Key 2017 trends
1. Owning the Long Game
In 2017, some of the world’s largest investors may differentiate themselves by gearing toward the long view as globalization and technological advancements have strained social cohesion and fanned populist sentiment.
2. The Shift from Regulatory to Physical Risk
Focus on policy uncertainty around climate change in the wake of the U.S. election is misplaced. In 2017, we believe investors will turn their attention to mitigating exposure to the physical risks from global warming, especially as water is becoming scarcer in regions from the Middle East to the U.S.
Measuring Water Dependency and Security in US Equity Fund Holdings, June 2016
3. Choosing Stewardship in Asian Capital Markets
Rapid adoption of codes that promote engagement between companies in Asia and investors is challenging the conventional wisdom that Asia lags global peers in corporate governance. In 2017, the real work starts, with investors facing a choice between proclaiming the importance of corporate governance without actually supporting improvements in companies’ practices to influencing companies’ behavior and pushing for change that stewardship brings.
4. ESG Investing as a Precision Tool
Research that points to ESG factors as a performance indicator continues to grow. In 2017, institutional investors may seek to integrate ESG signals across asset classes, markets and factor exposures.
5. Going for Goal with a New Performance Language
The U.N.’s Sustainable Development Goals are becoming a de facto framework for bringing together investors, companies, governments and citizens with an aim of protecting the planet, ending poverty and promoting peace and prosperity. In 2017, we see the increased adoption of corporate disclosures targeting these goals as a boost for institutions that aim to broaden their sustainable investment programs.
6. Green Shoots in China and India’s Sustainable Finance
The surge of innovation in sustainable development projects and initiatives in China, India and other emerging markets has been greeted with equal parts optimism and skepticism by institutional investors. In 2017, domestic and global standards will likely converge as companies in these markets deepen their understanding of standards required to attract foreign capital.
The author thanks Matt Moscardi for his contributions to this blog post.
Integrating ESG into Factor Portfolios
Raising Minimum Governance Standards
2016 ESG Trends to Watch: Opportunities and Risks
Watch the '2017 ESG Trends to Watch' recorded webinar.