A boom in environmental, social and governance (ESG) investing is set to accelerate in line with advancements that bring new ways of approaching the strategies, according to Dr. Steffen Hörter, Global Head of ESG at Allianz Global Investors.
Speaking at the Innovate2Invest conference on May 21, Dr. Hörter said that responsible investing has undergone rapid growth in recent years thanks to client demand, global regulation and the acknowledgement that ESG factors can generate excess returns. While this trend is set to gather pace, the next leg in the responsible-investing expansion will be determined by the following five points, or “tools,” he added:
- Creation of stronger ESG investment signals through sustainable ratings that move beyond largely backward-looking corporate disclosure
- Use of artificial intelligence that enables continuous, real-time big-ESG data harvesting
- Implementation of transparent performance attribution analysis that can accurately determine the ESG premium
- Design of functional ESG risk models such as carbon stress testing
- Development of ESG risk-hedging tools such as futures1
These “pieces add to the whole puzzle,” Dr. Hörter, who is also a member of the European Commission’s Technical Expert Group on Sustainable Finance, said. “When all those parts are solved, ESG will unleash the very full potential it has for investment performance.”
ESG as a driver of alpha
Allianz Global Investors has committed to integrating ESG factors across the 505 billion euros the company has under management on the conviction that responsible investing improves portfolio performance.
During his presentation, entitled “The Future of ESG Investing,” Dr. Hörter explained that ESG’s financial premium is derived from three sources. Firstly, by underpinning the formation of a company’s intangible asset value. Secondly, by enabling strong risk management; and, thirdly, as ESG allows investors to exploit market inefficiencies where ESG information is “gray.”
“The ESG alpha has two sides: the risk management side, and the opportunity side that often gets overlooked,” the money manager said. He added that the transition to a green economy provides an “investment opportunity where we try to get returns that we don’t find in other assets.”
New sustainability goals to attract money flows
Regulation will play an important role in coming years by “firing up” asset flows into sustainable strategies, Dr. Hörter said. In particular, new targets by the European Union to comply with United Nations Sustainable Development Goals and the so-called Paris Agreement on Climate Change will drive the asset-management industry to shift strategies and investment benchmarks along responsible criteria.
The European Commission (EC) has launched an Action Plan that aims to boost the role of investors when it comes to implementing ESG principles in the corporate world. The EC has estimated an annual financing need of 270 billion euros to meet its climate, water and renewable energy targets.2
ESG becomes mainstream
A poll presented this year by Allianz Global Investors supports Dr. Hörter’s forecast that the growth in responsible portfolios is only in its early stages. In the survey by the Frankfurt-based asset manager, 72% of investors said they expect to manage all their assets in an ESG-conscious way by 2030 or sooner.
“ESG will not go away,” Dr. Hörter said. “If anything, it is about to get fully mainstream.”
1 In February 2019, futures contracts on three ESG benchmark indices – the STOXX® Europe 600 ESG-X Index, EURO STOXX 50® Low Carbon Index and STOXX® Europe Climate Impact Ex Global Compact Controversial Weapons & Tobacco Index – started trading on Eurex.
2 European Commission, ‘Reflection Paper Towards Sustainable Europe,’ 2019.
