Although some parts of the industry already do so, it is not
necessary to accept lower returns from ESG products in the
capital markets or other financial investments. Richard
Mattison, CEO at Trucost ESG Analysis, part of S&P Global,
said that the sacrifice is unnecessary in the long term.
Speaking to IFLR for our
special report on ESG, Mattison said that industry
discussions about lower returns tend to refer to cycles of one
to four years maximum, which does not reflect the lifecycle of
the average investment or pension fund.
We asked a number of ESG managers from banks and asset
managers whether they would be willing to accept lower returns
for ESG products. An overwhelming 80% of respondents said that
Mattison, however, does not feel that this is necessary.
"Firms should not be willing to accept lower returns over
the average time horizon of a pension fund. In the long term
they should actually expect higher returns," he said.
See also: ESG: Asset managers vary in
In his view firms can easily create passive investment
structures, funds or indices that can accurately mirror a
benchmark while reducing CO2 by up to 40 or 50% over time. "You
don't have to sacrifice returns at all. That is a purely
quantitative-based approach in the context of an index," he
The difficulty on the active side is that when sceptics cite
volatility and lack of return, they discuss a wide range of
different investments, from early-stage sustainable tech all
the way to offshore wind, which now reliably produces energy at
cheaper costs than normal grids. "There are ways of creating
investment structures that reliably mirror benchmarks that look
at and replicate returns while creating more desirable societal
outcomes," said Mattison.
Tim Cameron, head of the asset management group at the
Securities Industry and Financial Markets Association, told
IFLR that in his experience asset managers don't actually
expect lower returns. "They can be competitive and not
necessarily accept lower returns. It's part of the competitive
evaluation. Most people who act in the ESG space tell you they
are going to be competitive with market-appropriate
benchmarks," he said.
On the in-house side, Emily Chew, global head of ESG
research and integration at Manulife Investment Management,
said that her firm believes sustainability helps to drive
financial value, and does not view it as necessary or desirable
to accept lower returns in order to integrate ESG factors into
"The ability to create financial value depends on the health
of our natural environment and the strength of the social
infrastructure in our communities. As such, we believe that ESG
analysis is integral to understanding the true value of an
investment," she said.
"Conversely, we believe it will probably become necessary to
accept lower returns if sustainability is not considered in
See also: High hopes for EU sustainable finance
Sustainability will arguably be the most significant
mega-trend shaping the world’s economy over the
coming decades. As sustainability themes increasingly come to
the fore for the companies in which firms invest, the
research-driven contextual insight of active investment
managers will be critical for properly assessing and responding
to the related risks and opportunities for clients.
Is it already happening?
In conversation with a number of survey respondents, it
became clear that in certain parts of the market, ESG products
are already outperforming their conventional counterparts.
Anne van Riel, head of sustainable finance in the Americas
for ING, said that her firm offers sustainability-linked loan
products with a discount - albeit small - if companies meet ESG
"We are a corporate and we need to make our returns, so we
accept marginal discounts and we see a risk-return trade-off.
We ultimately believe that companies that have better polices
in place have a better ESG performance, and also have lower
risk," she said. "From a risk-return perspective it still meets
our interests. Ultimately, longer term, that profile should
remain intact, and if you accept lower returns you should also
be met with lower risks."
An EU-based asset manager also confirmed that it is already
happening, and added that the reverse is also becoming true.
Essentially, there is a link between ESG and credit risk, but
it is typically long term.
"If you are willing to accept a lower return on the short
term stability when the connection between ESG and credit is in
the long term, the reality is you may have a shorter facility
with the client, or you may have a long term security with the
client," they added. "Influencing the behaviour of the client
in the short term may be important, not for the short term
facility, but for the long term security that you also have on
In the future it is not impossible to imagine that adequacy
ratios for banks are tilted in favour of green - or
disincentivise brown by creating a prudential measure to
rebalance portfolios towards green.
Read the full survey here
also: Critical challenges facing the green bond