“Of course, the financial performance of investments remains important for investors, but now sustainability considerations have become mainstream. Thus, performance is no longer the only driving factor,” Mr Bösken said. While it was once considered as a trend it becomes more and more mainstream and completely integrated in investors decisions.
Strong ESG demand
“We see increasing numbers of investors seeking long term investments that make an environmental and social positive impact,” he added. BIL has seen a dramatic increase for sustainable products from investors. Of course, this goes in step with the fundamental philosophy of portfolio investing, which is focused on making long term returns which ride-out short-term turbulence.
We see increasing numbers of investors seeking long term investments that make an environmental and social positive impact,
Increasingly it is wealthy individuals who are embracing this outlook, with many of them being young people. “Initially ESG was driven by institutions such as pension funds and insurance companies keen to offer socially responsible end products to their clients,” said Mr Bösken, “but in the latest wave we are seeing a large share of private individuals seeking these investing options.”
Newly wealthy inheritors
To a large extent, this trend is driven by generational change. This cultural shift of increasingly environmentally and socially aware youth has been evident for a number of years. This was underscored by the Covid crisis, which demonstrated the need for our societies and the environment to be sustainable and resilient.
“Allied to this behavioural change is that we are seeing younger generations with unprecedented levels of wealth,” he said. Inheritance of valuable real estate and other investments is bringing windfalls of tens and hundreds of thousands of euros to people just starting out in life. Many are willing to make long term financial commitments.
With investment horizons of ten years or more, ESG products – which also tend to promise long term impact – look particularly attractive. This is especially the case for people who want to make a difference beyond simply fructifying the wealth that has fallen in their laps. Older investors are also changing. When discussing inheritance, increasingly families request that sustainability criteria be incorporated.
ESG’s inherent long-termism
Many academic studies indicate that the long-term approach favoured by ESG investing strategies is beneficial for financial returns, and that they deliver lower volatility. Sceptics point to the recent year of the Russo-Ukraine war having sent commodity prices soaring. Portfolios invested in fossil fuel production have boomed while most other assets have struggled.
“Yes, in the short term, traditional investing strategies have yielded strong profits, but what about the long-term perspectives,” Mr Bösken noted. For example, global capital expenditure on wind and solar generation projects will be nearly double the 2021 level this year, according to the consultants Rystad Energy. It is possible that high energy prices are driving rapid change in the energy production market. There is growing risk that unreconstructed companies could be over-invested in potentially “stranded assets” that they would struggle to monetise.
“It’s important to have an exit strategy with each investment, and with environmental and social sustainability an unstoppable trend, this is set to become a growing concern for many businesses that appear to be in strong financial health now,” said Mr Bösken. This is the new frontier of portfolio management. Where once this activity was focused on financial returns, these need now to be balanced with the long term ESG considerations.
Many academic studies indicate that the long-term approach favoured by ESG investing strategies is beneficial for financial returns, and that they deliver lower volatility.
Making these assessments is of course tricky, not least as asset managers are racing to acquire these skills, and with minimal market experience to guide their choices. This is where BIL Asset Services comes into play to help clients putting their UCITS and AIFs into action and provide for their operational setup, leaving them to focus on their goals while BIL Asset Services is taking care of the rest.
No silver bullet, but…
No doubt the ESG revolution is an exciting market development, but Mr Bösken counsels cautious optimism. “ESG is definitely not a silver bullet for generating extra performance,” he said. “Much depends on investment picking abilities to create financial and sustainability alpha, as just stipulating that your product is adhering to ESG is not enough,” he said. “Performance will remain important, but it’s definitely no longer the only factor.”