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Outlook 2018 IV: the Road to Wider ESG Integration

Jan. 29, 2018

Jan. 29, 2018

Somehow ironically, in the year when President Trump announced the US withdrawal from the Paris Agreement on global warming, more investors turned to climate-aware strategies, helping them outperform.

The STOXX® Global Climate Change Leaders index rose 28% in 2017.1 So did the STOXX® Global ESG Leaders index, which more broadly tracks companies with best practices in environmental, social and governance principles (ESG).

Last year saw banks, private-equity firms and traditional asset managers introduce new vehicles that invest in companies ranking high in ESG. Surveys showed increasing commitment to investing responsibly – from large pension funds to individual millennials.2

ESG vehicles are likely to continue their upward trend as more asset owners and institutional managers assume the fiduciary obligation of investing responsibly.

The ESG integration paradox
The starting point for growth in ESG investments is quite low, as still relatively few managers have dedicated sustainability strategies. But at the same time, the acknowledgement that sustainable principles provide long-term outperformance is becoming more accepted.

In this sense, it is interesting to pick up on some findings collected recently by Michael Cappucci, senior vice president at Harvard Management Company Inc. In a paper3 entitled ‘The ESG Integration Paradox,’ Cappucci points to surveys that show that most money managers believe full ESG factors integration into their portfolios brings the greatest return benefit.

However, only few managers in similar surveys say they have adopted a full integration strategy.

Researchers from the University of Oxford and Harvard Business School in 2017 asked senior investors whether they believed various ESG strategies improve or reduce returns relative to a market benchmark. Full ESG integration was the highest rated strategy, with more than 60% of respondents saying it has a beneficial impact on investment performance.4

Still, a State Street survey also last year indicated that only 21% of institutional investors use full ESG integration, either alone or in combination with other methods.5

As more investors make a move to close the gap between ESG intentions and practice, there is scope for sustainable and responsible investing strategies to grow in 2018 and beyond.

STOXX’s low-carbon and ESG index family can help integrate climate-change and responsible investing into portfolios as overlays or as a core approach. For more on these products, please click here. To read about the Climate Impact and Climate Awareness indices tracking companies in transition towards sustainability leadership, click here.

A green bond boom
One segment that is seeing strong inflows is that of green bonds, used to finance low-carbon and climate-resilient infrastructure projects.

Issuance of green bonds likely reached $130 billion in 2017, 59% higher than the record total of 2016, according to the Climate Bonds Initiative.

With more governments and agencies lining up to issue green bonds, the market’s growth will accelerate even further in 2018, according to AXA Investment Managers.6

In June 2015, the World Bank announced its first green bond linked to a STOXX benchmark, when it issued a $50-million, 10-year structured bond tied to the performance of the iSTOXX® Europe ESG Select 30 Index.

The drive to a low-carbon economy is a long-term, structural phenomenon that will likely leave a mark on financial markets in the next few years.

Featured indices
STOXX® Global Climate Change Leaders
STOXX® Global ESG Leaders
iSTOXX® Europe ESG Select 30 Index
STOXX Climate Impact and Climate Awareness indices

1 Gross return in USD.
2 Morgan Stanley, ‘Morgan Stanley Survey Finds Interest in Sustainable Investing Stronger than ever,’ Aug. 9, 2017.
3 Cappucci, Michael T., ‘The ESG Integration Paradox,’ Jun. 8, 2017.
4 Amel‐ Zaheh, Amir and Serafeim, George, ‘Why and How Investors Use ESG Information: Evidence from a Global Survey,’ March 2017.
5 Eccles, Robert G. and Kastrapeli, Mirtha D., ‘The Investing Enlightenment,’ State Street, March 2017.
6 AXA Investment Managers, ‘Green Bonds: market set for growth across regions,’ Dec. 2017.


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