Importance of Responsible Investment
Responsible investment ‘RI’ is an integral part of the investment process for many EFAMA members. Asset managers invest in the best long-term interest of their clients and are aware of the environmental, social and governance ‘ESG’ challenges that can influence investment performance. There has been a recent surge in RI, due to the growing interest of beneficiaries in ESG factors. Increasingly, asset managers see their capacity to integrate RI in investment processes and decisions as part of their operational excellence and a key element of their competitive advantage. By listening to its clients, the asset management industry is scaling up ESG investing in accordance with investor demand.
A non-regulatory issue
EFAMA sees RI as a non-regulatory issue, acting beyond the realm of legislation. RI is a diverse and growing field, where many methods of selecting ESG friendly investments are used, and where asset owners have to decide on standards, ethical or social norms. Regulatory requirements would make ESG investments a compliance issue and as a result the importance of the conviction of the positive effects of ESG investments would diminish.
The importance of asset owners’ view of the world & fiduciary duty
The first step in the RI process is for asset owners to define their values and objectives and how they are to be incorporated, if at all, into their investment mandates. Asset owners’ view of the world, political ideas and values come into play, leading to a wide variety of choices. In terms of integrating ESG factors in the investment process, the fiduciary role of asset managers, acting on behalf of investors and beneficiaries, has been clarified in two reports by Freshfields (2005) and UNEP FI (2009) respectively. ESG factors should be taken into account in investment decisions when it is in the best interests of the beneficiaries and should be embedded in the legal contract between asset owners and asset managers.
Responsible Investment & Performance
EFAMA believes the risk-return-cost triangle in RI is not any different from other investment beliefs. In fact, RI is a means by which risk can be reduced, while keeping up with returns. Asset managers are increasingly incorporating RI analysis into the selection and management of investments as a means of reducing risks.