Challenges and opportunities within the ESG space

The three hottest letters in investing right now might be ESG — but certain hurdles have emerged

As consumers, we’re more aware of the environmental and social impact of our consumption than ever before — and today, this awareness impacts how many people invest. It’s been two years since Invesco Unit Trusts launched our ESG Opportunity strategy. Since that time, the growth and attention around ESG (Environmental, Social and Governance) investing within investment communities has continued to progress at a tremendous pace. Assets in the United States grew 38% between 2016 and 2018,1 and 2019 appears to be no different. Yet as with many things that grow quickly, there can be growing pains, as well. In this blog, we’ll explore some of the challenges and opportunities that Invesco UITs has uncovered within the ESG space.

What ESG challenges have emerged in recent years?

Today’s ESG investors face a few recurring challenges:

  • “Green-washing.” Some critics have argued that the significant growth in ESG assets is due to green-washing (i.e., when an asset manager uses some level of ESG data to aggregate an ESG score for their strategy or fund, with little effort to truly understand or integrate ESG into their investment framework). Fortunately, we’d argue this practice is becoming less common as investors grow more informed about the ways asset managers are implementing ESG into their investment process. For example, due diligence questionnaires no longer have a mere ESG box checkbox, but instead include thoughtful questions to understand the ESG process and stakeholders, third-party partnerships and the ways additional data is leveraged.

  • Inconsistent ESG disclosures. Another challenge involves the inconsistent ways companies disclose information about their environmental, social and corporate governance practices, which are not always comparable across corporations. On the positive side, we’re thrilled that companies are reacting with transparency to investor’s requests for ESG-related information — information that’s fundamental to assessing some of the risks that they face. However, it can be difficult to determine how one company’s ESG information compares with another’s. One of the most common solutions is to use a dedicated research firm or team to aggregate the data into something comparable and quantifiable, often with a score and key findings about a corporation’s ESG practices.

  • Education gap. Finally, asset managers continue to face a challenge that we encountered two years ago when the ESG Opportunity strategy launched: the education gap. With so many different approaches falling under the umbrella of socially responsible investing, it’s imperative that asset managers’ intentions align with investors’ expectations. We feel that this presents a unique opportunity for asset managers, financial advisors and investors alike to build a meaningful investment dialogue around the purpose of ESG investing.

What are some of the opportunities that exist in the ESG space?

There are two sides to the opportunities that exist within the ESG context: the asset managers/investors and the companies in which they invest. In April 2006 the United Nations launched the Principles for Responsible Investment (UNPRI) based on the idea that ESG issues should be considered part of the investment process, as they can influence investment returns. Currently there are 2,450 signatories to the UNPRI, nearly 20% of whom have been added over the last 12 months. Merely becoming a signatory doesn’t qualify someone as an ESG manager, but it’s the first step in beginning to align the investment framework with some commonly agreed upon principles.

There are opportunities on the corporate side as well. As mentioned above, we believe the primary opportunity comes through developing clarity around what is (or isn’t) being reported. Much like the Generally Accepted Accounting Principles (GAAP) pioneered by the Financial Accounting Standards Board, responsible investing has seen the emergence of the Sustainable Accounting Standards Board, which was established to provide a commonly agreed upon set of reporting standards that are applicable within a company’s sector/industry.

Where is the interest in ESG coming from?

Millennials are often cited as the generation with the greatest desire to align their values with their investments. According to recent research from Morgan Stanley, that’s true, but interest outside of that generation is actually growing at a slightly faster rate.2

A recent survey by Morningstar showed significant interest from Generation X in ESG investing. With most Baby Boomers firmly into their retirement years, their interest has moved toward preserving their savings. However, as Generation X lands squarely in “peak savings” mode, their conversations around ESG investing are likely to increase.

Final thoughts

Amid the growth seen around ESG, one thing remains clear: Investors want to understand a company’s long-term value creation plan, initiatives, best practices and any inherent risks (both financial and non-financial) via more standardized information around ESG. Management teams at publicly traded companies appear to have gotten the message that investors want more ESG-related information — but it is still up to the investors to determine how they use that information.

At Invesco Unit Trusts, we believe that failure to incorporate analysis of ESG characteristics into the investment process overlooks ESG’s potential effect on long-term investment performance, as well as investors’ desire to invest according to their values. We expect the growth in assets and interest around ESG investing to continue in the years to come. With that growth will come new challenges and opportunities, but ones that we will lean into rather than shying away.

1 Source: US SIF Foundation, “Sustainable and Impact Investing — Overview,” October 2018

2 Source: Morgan Stanley Institute for Sustainable Investing, “Sustainable Signals: Individual Investor Interest Driven by Impact, Conviction and Choice,” September 2019

Important information

Blog header image: Jeff Wasserman / Stocksy

There is no assurance the trust will achieve its investment objective. An investment in this unit investment trust is subject to market risk, which is the possibility that the market values of securities owned by the trust will decline and the value of trust units may therefore be less than what you paid for them. This trust is unmanaged and its portfolio is not intended to change during the trust’s life except in limited circumstances. Accordingly, you can lose money investing in this trust. The trust should be considered as part of a long-term investment strategy and you should consider your ability to pursue it by investing in successive trusts, if available. You will realize tax consequences associated with investing from one series to the next.

An issuer may be unwilling or unable to declare dividends in the future, or may reduce the level of dividends declared. This may result in a reduction in the value of your Units.

The financial condition of an issuer may worsen or its credit ratings may drop, resulting in a reduction in the value of your Units. This may occur at any point in time, including during the initial offering period.

You could experience dilution of your investment if the size of the Portfolio is increased as Units are sold. There is no assurance that your investment will maintain its proportionate share in the Portfolio’s profits and losses.

The Portfolio invests in securities of companies demonstrating favorable ESG practices. The companies may not have applied favorable ESG practices in the past and there is no guarantee that the companies will continue to apply favorable ESG practices over the life of the Portfolio.

10/19                     NA9506

Nathan Miller is a Unit Trust Equity Portfolio Manager and is responsible for research and security selection for equity unit trusts.

Mr. Miller has been with Invesco since 2015. He entered the industry in 2004 and has held roles in research, product development, product management and sales. Prior to joining Invesco, Mr. Miller served as a credit analyst with First Trust and as an assistant vice president of unit investment trusts with Guggenheim.

Mr. Miller earned a BS degree in finance from the University of Illinois at Chicago. He holds the Series 7, 24 and 63 registrations and is a Chartered Financial Analyst® (CFA) charterholder.

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