ESG investing in the age of transparency
We have entered an extraordinary age of transparency. For the first time in history, shareholders, customers, employees, and society as a whole are demanding that businesses make themselves 100% visible. The outside world is now seeking an open window into every aspect of operations, such as financial data, employee grievances, email communication, #MeToo scandals, and more. Included on that long and growing list is ESG—a company’s environmental, social, and governance policies. And almost every piece of that information is available online to anyone who knows how and where to look.
For investors, this shift to transparency has significant implications. Corporate investors need to be able to answer to their clients, a growing number of whom see ESG and impact investing as the ideal tools to align their values with their investment strategies. Retail investors face the same challenge and, indeed, the same opportunity.
It wasn’t long ago that this focus on ESG was confined almost entirely to ‘radical’ investors—Millennials, liberals, and anyone who put their hearts far above their wallets—who were committed to investing only in vehicles they could feel good about, but that weren’t necessarily the best options from a returns perspective. But with the push toward transparency has come a growing consciousness on the part of the wider world of investors about how exactly they want their invested assets to be used.
When we first introduced the index five years ago, most conversations with investors interested in exploring the ROBO Global Index Series—small banks, large pension funds, and every investor in between—were focused on the business fundamentals and growth potential of our index members, the total cost of return of our index-based fund, and the exciting research from our strategic advisors. That’s no longer the case. While the ESG movement is still in its earlier stages in the US, in the UK and Europe where I spend the bulk of my time, ESG is not an option, it’s an absolute requirement. Today, the first question from nearly every investor I speak with is: “What is your ESG policy?”
At ROBO Global, it’s an easy question to answer. We’ve understood the need for transparency from day one. To provide investors with the ‘open window’ they desire and keep the index aligned with our own values, ROBO Global began by building a clear ESG filter into the core of our ROBO Global Industry Classification Methodology. By doing so, the performance of the index is tilted toward ESG from the start. We identify a universe of technologies and applications that are suitable for inclusion in the index. We then apply ESG risk ratings from Sustainalytics, a global leader in ESG and Corporate Governance research and ratings. Using that input and additional information from Bloomberg and the knowledge of our Strategic Advisory Board, we ensure that every index member is appropriate for inclusion in portfolios with even the strictest of ESG conformance requirements. Today, ROBO Global is the only robotics index with an ESG Policy that is built into its selection criteria.
Ultimately, ESG is about much more than simply punishing companies that don’t comply or promoting environmental and social change. It’s also about assessing the non-financial factors that can potentially dampen returns. Environmental policies affect future profitability by impacting a company’s ability to be energy and resource efficient and to thrive in the future. Social policies dictate how effective a company is at contributing to society, attracting and retaining top talent, and appealing to increasingly ESG-conscious consumers. Governance policies—which include compliance standards and regulatory adherence—can directly affect profitability and stock market valuations. Combined, ESG is about identifying and investing in stocks that are positioned to thrive in a world that is increasingly conscious about environmental and social issues that impact us all.
The alignment between the companies within the ROBO Global Index Series and ESG is a key reason investors eyeing robotics and AI are so interested in our offering. Here in the UK, our index partner has one of the most forward-thinking ESG visions in the industry. The company’s vision is “to encourage positive change in the companies and markets in which we invest,” and their focus on active ownership that uses their “scale and influence to bring about real, positive change to create sustainable investor value” seems to carry through in everything they do. This level of commitment to ESG is growing every day, and the next generation of investors will only increase the importance of this mandate.
Transparency in every aspect of a company’s operations is the new norm. That’s great news for corporate and retail investors who are seeking to invest in companies that are helping to improve our world and to increase long-term investment returns. As ESG grows to become a truly global mandate, that transparency will be key to ensuring that every investment is aligned with the investor’s own values, the values of their customers, and the need to create a portfolio that is designed to thrive in the future.
By Richard Lightbound, CEO—EMEA, ROBO Global
Learn more about ESG investing and the role of robotics and AI at the 2-day
BrightTALK summit, SRI, ESG, Impact & Ethical Investing on October 30-31, 2018.
A featured speaker at the online event, Richard Lightbound will share his perspectives on
How to Integrate ESG as Part of a Successful Asset Mix.
Click here to register.