Two years ago, my son gave my family a shock – he was turning vegetarian. Soon after, he surprised us again by resolving to stop flying. He was always very environmentally aware and both decisions were taken to reduce his carbon footprint. Yet, he also loved steaks, burgers and exotic holidays. Since then, he has stuck to his principles and never wavered, however inconvenient.
We are witnessing a similar shift from our clients when it comes to ‘ESGising’ their investments. A growing number of studies show that ESG investments generally exhibit robust performance, especially through crises, and more importantly, they add value, which becomes more significant over longer time horizons.
These findings should be carefully considered by investors who feel they are walking a tightrope between integrating their ESG criteria and fulfilling their fiduciary duties – a false dichotomy, but a perception, nonetheless.
As a result, we now see ESG considerations starting to outweigh traditional investment metrics in clients’ portfolios. I think that with rising ESG adoption we are going to see further changes in two stages:
Tracking error will become more acceptable and even, in some cases, desirable as proof that ESG is being taken seriously. As ESG considerations often differ widely between investors, this could lead to a wide range of acceptable tracking errors.
ESG metrics will eventually make their way into standard benchmarks and then be used by asset owners in their reference portfolios, making ESG-related tracking error more "normal".
Unlike my son’s New Year’s resolutions, these changes won’t happen overnight, but I believe they will be similarly steadfast. As for me, even though I still (guiltily) enjoy the odd cheeky kebab, I also realise that in the long run the plant-based diet which my family increasingly follows is better for my health.
Who knows, I might turn vegetarian myself one day, but probably not overnight.
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