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Is ESG Just a Fad?

VIDEO: Morningstar's Elizabeth Stuart explains some of the biggest themes in investing and why ESG is here to stay 

Holly Black 9 October, 2019 | 9:53AM

 

 

Holly Black: Welcome to the Morningstar series 'Ask the Expert'. I am Holly Black. With me is Elizabeth Stuart. She is ESG analyst at Morningstar. Hello.

Elizabeth Stuart: Hi, Holly.

Black: So, it's Good Money Week. So, we're talking all things ESG. And I think one of the most exciting things at the moment is how many areas you can invest in within ESG. So, what are some of the biggest themes you're seeing at the moment?

Stuart: Absolutely. This year, we can't talk about ESG without mentioning climate change. And October marks a year since the IPCC special report on 1.5 degrees was released. So, that's the Intergovernmental Panel on Climate Change, release their guidance report on how we are to meet our climate challenge.

That is the report that moved the deadline from 2050 to 2030, just giving us 12 years to avoid total climate catastrophe. So, this year, we've really seen the financial industry respond to that. So, creating bespoke climate products, and also bringing a lot more of their phones in line with a transition to a green economy.

Black: And there's, obviously, more to ESG than just climate change. So, what are some of the areas you're focusing on outside of that?

Stuart: Yeah. We're seeing a lot more, I think, on engagement, and we think 2020 will really be the year of engagement. So, just to contextualize, engagement in its simplest form is a way by which an asset manager or owner can bring about positive change within its investees. And we're seeing a real systematic improvement on how those engagements are escalated over time, and how they're reported on as well to the public and also to clients.

Black: So, I think the thing is, a lot of this is very good intention stuff, but actually translating it into an investment and then financial returns is a bit different. So, is this just a fad? Is it just that it's trendy to talk about climate change this year?

Stuart: Yeah. I think with people asking is ESG a fad and I don't have a crystal ball; we can't see into the future. But what we look at in terms of evidencing a trend is, we look at the drivers and the drivers for ESG or sustainable investment are largely climate change and environmental issues; and then, also that wealth generational flip of Gen Zs and also millennials. And neither of these two things are going away anytime soon.

I can't see climate change being solved in our lifetime. And I also – with Gen Zs coming up as well, not only as consumers, but also as employees on the type of things they demand from their employers, I don't see either of those things going away anytime soon. So the conflation is that the reactionary trend will stick around as well.

Black: Well, I suppose the third thing we need within that we need the trend, we need the people that want the products, but we also need the financial firms to create the product to make them good enough.

Stuart: Yeah. And we are seeing a real proliferation of that. And the needle is continuing to move; and the goalposts are continuing to move. Last year, we had in Europe alone 305 ESG or sustainability firms launched.

Black: That's insane.

Stuart: And this year, we're probably going to match that as well. So, the financial industries are – they do have an answer for that kind of call to arms.

Black: Well, thank you so much for your time.

Stuart: No problem. Thank you.

Black: And thanks for joining us.

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Holly Black  is Senior Editor, Morningstar.co.uk

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