Why all asset classes should focus on ESG

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As I have already explained in these pages, investment managers have a central role to play in building a sustainable planet, as well as sustainable wealth for its clients, through its deployment of capital and its management through a commitment with the companies in which they invest.

Public equities and credit have received a lot of investor attention and media headlines when it comes to integrating ESG considerations. But there is less talk of private markets and alternative assets, such as real estate, infrastructure, private equity or private debt, and the vital work they can do in the name of sustainable wealth creation.

Benefits of ESG investing

This may have something to do with the fact that it has only been in the last couple of years or so that the consideration of E, S, and G has become mainstream, with investors seeing it as an essential part of both. to identify investment opportunities and risks. And by their very nature, dialogue has remained largely tied to the arena of public investment.

However, I have long argued that if we disregard E, S and G, we are failing in our fiduciary duty. By extension, this means that it is as relevant and applicable to private markets as it is to public procurement.

Active property

Fortunately, investing in the private market creates many opportunities to influence positive change. Whether private, real estate or infrastructure investors, investments are often accompanied by a seat on the board of directors and what better place to ensure that governance, social or environmental issues are fully taken into account? It’s like having an internal stewardship team.

This is well illustrated by the work our real estate team has done with partner investors and developers to deliver major urban regeneration projects such as Kings Cross in London and Paradise Circus in Birmingham.

Active and responsible investing is the driving force behind this model of downtown regeneration, with the goal of creating sustainable communities as well as generating consistent long-term returns for investors.

This very active and practical approach also makes it possible to address very directly the profound structural changes that were already underway but accelerated due to Covid technology, increased environmental awareness and social inequalities.

Data and normalization

While there is already considerable ESG engagement in private markets, one of the challenges is the lack of shared and standardized ESG data covering private companies.

A series of regulations and investor demands have forced publicly traded companies to report on ESG and broader sustainability measures.

As a result of this, we have since seen the emergence of common frameworks for quantifying this data, which is welcome progress.

ESG integration methodologies are generally not as readily available to private market investors, nor are there any ESG data providers covering this space, which usually means doing their own fundamental and bottom-up ESG research on the issuing companies.

This is by no means a show-stopper, with the active ownership model allowing so much insight to private investors, but it is an area that will come under scrutiny with greater demands. transparency imposed on private companies.

Progress, but let’s not stop there

We were encouraged by the recent emphasis on ESG integration in private markets. For example, private debt strategies took the lead with almost 50% dedicated to ESG, which was surprising to see that debt was not the first to adopt such approaches in the public sphere.

In addition, some private market investors and investment managers have, for the first time, requested standardized environmental disclosures from more than 1,000 private holding companies through CDP, the global non-profit environmental disclosure platform.

These are positive steps, but there is still a long way to go.

We would like to see a greater incentive for private companies to assess and disclose their ESG metrics, allowing investors to invest in a more credible and responsible manner across their product line.

The potential to influence real and lasting results through active ownership is enormous – in public and private markets.

While the investment industry cannot do this alone, it wields tremendous influence with which it can not only deliver returns to its clients, but also help create a more sustainable society for all of us.

Saker Nusseibeh, CBE, is CEO of Federated Hermes International Business


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