Is the planet ready for 100-year olds?
Increased Longevity is putting massive demands on the world. Not only are we living longer, we are doing so in a world in which climate change, pollution and resource scarcity pose an existential threat to our survival and our planet. As we ponder the prospect of a long life, we can no longer think short-term about either investing or our planet. We have to approach both in a long-term, sustainable way. And, the question that I believe is at the crux of this is: Can incorporating environmental, social and governance considerations into our investment thinking help to address the challenges and opportunities thrown up by an ageing world?
There are three reasons why I think the answer to that question is yes.
The first is that there is a structural shift underway toward a greater focus on environmental, social and governance factors that is likely to continue for some time. Part of the reason for this is demographic change. Living longer is no longer the privilege of a few or the stuff of science fiction. It touches billions around the world in significant ways and there’s a growing recognition that it will shape our future and, thus, how we need to live today. This is visible, for example, in the ways in which consumer preferences are shifting. For instance, people are drinking fewer high-sugar soft drinks these days, in an effort to be healthier.
Likewise, within the investment space, 86% of millennials are interested in responsible and impact investment as they recognize the power they have to help influence company decisions. Many of these trends are not new, I hear you say. What is new, however, is that now they are all happening simultaneously. And, because you have companies, investors and corporations all going in the same direction, you are likely to see these disparate elements creating a self-reinforcing cycle. That is why I think this is a structural trend that is here to stay.
Future proofing portfolios
The second reason is the growing recognition that ESG considerations can help to future-proof portfolios and investments by creating a virtuous cycle of financial returns and impact returns. At this point it is useful to define the difference between the ESG integration and impact investing. The key difference is the degree to which the investor is looking to affect change. –Within ESG integration the main objective remains financial performance and using ESG information to improve my ability to address risks and generate returns. Impact investing, on the other hand, is about having a desirable societal effect as well as delivering financial returns. But, these two aims are mutually reinforcing. A good example of how this works in practice can be found in recent work around the impact of gender diversity on company boards of directors. In recent research, AXA IM Rosenberg Equities explored the links between company diversity and profitability. In essence, what we found was that higher diversity provides a profitability moat for the most profitable companies.
In other words, more diverse companies are more resilient in the face of competitive pressures. By integrating this ESG information into our process we should be better able to identify companies with a better-than-average ability to protect their profits. By doing so, we are them able to make better investment decisions, while, at the same time are promoting the cause of diversity. At the same time, from an impact perspective, strategies that seek to improve board diversity should give rise to more diverse firms that are better equipped to protect future profits.
ESG information is economic in nature
The third, reason is closely linked to the second. From my perspective and that of AXA IM Rosenberg Equities, ESG information is economic in nature. For us, the decision to integrate ESG is investment-led. By using it alongside traditional financial information it can provide a more complete view of what a company is worth. Doing this (and getting it right, of course) should lead to a better risk and return outcome – the means to an end, as I returned to earlier.
That said, I want to emphasise that we expect this improvement to be incremental and to take place over the long run, like many other good investment ideas. Predicting the improvements will not be linear and easy to predict, but we are confident that integrating ESG will improve returns and lower risk for investors over time.
As we live longer, the challenge is going to be how to invest for the long-term, how to identify assets which are going to endure, thrive and contribute to the new reality of our world. We firmly believe that integrating ESG considerations into the decision making process will help to do just that.