10 ESG Investing Themes for 2020
By: Nt Asset Management
Tags: Investing, Esg, Risk Management, Stocks

10 ESG Investing Themes for 2020

Improved data and analytics for environmental, social and governance (ESG) investing create an opportunity for investors to better manage risk and performance in their portfolios. Here are 10 key themes and trends that we think will drive the adoption of ESG over the year ahead.

#1 Consumer Demand

Since 2013, half of the growth in consumer packaged goods in the U.S. came from products marketed as sustainable.* The growing consumer demand for transparency and sustainability creates investment opportunities in companies that sell sustainable products and services. We incorporate a holistic view of companies across our strategies while maintaining a strong investment thesis and risk controls.

#2 Resource Shortage

A variety of sectors are heavily dependent on access to water resources such as utilities, apparel and agriculture. Companies with operations in arid locations are particularly exposed to the risks. The U.S. Forest Service estimates nearly half of the rivers and lakes in the U.S. may not meet needs in the next 50 years because of aging infrastructure, population growth and lower annual rain fall.** Investors should monitor how well companies manage water shortages and embrace efficient solutions.

The ESG investing market is dominated by mid- and large-cap developed market equities, but investors have a growing appetite to add other asset classes to complete balanced portfolios.

#3 Carbon Regulation Taking Shape

About 20% of global carbon emissions were covered by some sort of carbon tax in 2019. In the coming years, we believe this will grow to more than half, as close to 100 countries enact new regulations.^ Companies may face higher fuel costs, updated building codes and clean energy requirements. In 2019, Northern Trust Asset Management added climate risk as a five-year investment theme. Last year, we launched a new climate-aware strategy that focuses on companies with products and services that support lower carbon transition.

#4 Corporate Disclosure

We have seen significant progress in the amount and quality of corporate disclosures on sustainability, but investors still need more. Regulators are pushing globally for consistent metrics and additional insights into how companies are incorporating sustainability risks into their business plans. Reporting has historically been dominated by developed markets, but more companies in emerging markets are embracing ESG reporting. We are working with companies on better reporting and sustainability goals to create long-term shareholder value.

#5 Multi-Asset ESG Strategies

The ESG investing market is dominated by mid- and large-cap developed market equities, but investors have a growing appetite to add other asset classes to complete balanced portfolios. Last year, Northern Trust Asset Management launched a series of fixed income strategies with an ESG-oriented investment process.

#6 Quant ESG

Increasingly sophisticated quantitative tools can better incorporate ESG alongside other factors. ESG can help with portfolio risk management and be paired with compensated equity factors that have historically outperformed the broad market to provide more robust performance. These factors include quality, small-cap, value, low-volatility, high dividend and momentum stocks. We have developed factor-based ESG solutions for equities and bonds, which demonstrate that ESG analytics and factor investing can be successfully combined in the same portfolio.

#7 Companies in ESG Transition

Some companies have built sustainability into their long-term plans while others have made little progress. In the middle are companies that are in transition, and their potential to gain market share through sustainability is getting the attention of investors. We are researching how to best incorporate this group of companies into our investment strategies.

The disclosure and transparency of sustainability metrics, which are material to the business model, help aid investors in developing a more informed company profile while uncovering risks and opportunities.

#8 ESG Materiality

The disclosure and transparency of sustainability metrics, which are material to the business model, help aid investors in developing a more informed company profile while uncovering risks and opportunities. These insights allow for better comparisons, within industries, to identify firms that are leaders in sustainability to help establish best practices across the cohort. Refining the focus to materiality, investors can engage with firms in a more sophisticated manner on topics which are directly impactful to stakeholders and cash flow. In our investment process for our best-in-class^^ and quantitative strategies, we favor companies who are leaders within their respective industries and appropriately manage risk.

#9 Global Sustainable Development Goals

The 17 Sustainable Development Goals developed by the United Nations in 2015 can help identify drivers of sustainable economic growth in the long-term. With countries enacting new laws and regulations to meet commitments, companies and investors will need to remain nimble to identify and capture opportunities across the investable universe. We continue to align our efforts to investable and relevant sustainable investment goals.

#10 Active Ownership

In 2019, we engaged with companies across topics including climate change, human capital management, product safety, governance and executive compensation. Additionally, we continued our collective engagement efforts with the Climate Action 100+ with positive results and remained active within the Council of Institutional Investors and the Institutional Investors Group on Climate Change. We have formalized and updated our proxy voting and engagement policies, which are designed to foster strong governance with robust risk management practices and transparency among companies in which we invest on behalf of our clients.

— with contributions from Valeria Dinershteyn, Jay Eisenhardt, Emily L. Lawrence and Sharee Zlatkova

*Randi Kronthal-Sacco and Tensie Whelan. “Research: Actually, Consumers Do Buy Sustainable Products,” Harvard Business Review.

* Brown, T. C., Mahat, V., & Ramirez, J. A. (2019). Adaptation to future water shortages in the United States caused by population growth and climate change. Earth’s Future, 7, 219–234.

^World Bank Group. 2019. State and Trends of Carbon Pricing 2019. Washington, DC: World Bank. © World Bank. https://openknowledge.worldbank.org/handle/10986/31755 License: CC BY 3.0 IGO.

^^Best-in-class ESG is industry terminology referring to an investment approach that selects companies that are leaders in implementing ESG.