Responsible investing should be a no-brainer

Swiss Re makes a strong case for integrating environmental, social and corporate governance (ESG) criteria into the investment process.

Most would agree that ESG consideration in investments are the right way to go. In short, underlying risk-return profiles are expected to improve in the long-term if ESG is considered in investment decision-making. Why then isn't ESG integration part of the standard investment approach? One key reason, says Swiss Re, is the absence of commonly accepted terminologies, guidelines and market standards. Having a more standardised responsible investing environment with a generally agreed set of best practices would provide clear guidance to investors and would help to overcome investment barriers.

Another hurdle can be short-termism in the current investment environment. Nowadays, company analysis often focuses on short-term data projections. As a long-term investor, Swiss Re looks beyond the shorter-term to align its investment strategy with its business approach. Including ESG considerations reflects this approach as these factors materialise over a longer time horizon. Check out Swiss Re's publication "Responsible Investments: Shaping the future of investing" for more on the topic.

Institutional investors are also challenged by the lack of suitable ESG-related investment products. Investors usually measure their performance against benchmarks. Traditional benchmarks do not include ESG approaches in their security selection, especially in the fixed income area. Moreover, benchmarks that do include ESG considerations are often skewed towards a very specific theme, such as carbon footprint reduction, which many institutional investors deem too restrictive. The lack of best practice to manage climate risk in investments hinders the broader establishment of suitable investment products.

Despite hopeful signs, much more work still needed

There are signs, however, that the industry is gradually developing its own solutions for these key issues. In 2014, for example, the International Capital Market Association (ICMA) created Green Bond Principles to help investors and issuers to deploy capital into green investments.

But overall, much of the available information and recommendations related to longer-term, more sustainable investing remain on a rather theoretical level and are not sufficiently concrete for long-term institutional investors.

Undoubtedly, more work lies ahead for the investment community: besides the needed industry standardisation, more long-term research on financial market implications will be required to consolidate the benefits of ESG integration. There is also a need for more private market products such as benchmarks, screening tools and standard ESG rating methodologies to offer institutional investors a broader set of options. This remains a journey and learning process for all financial market participants.



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