Investors are motivated to invest E, S and G are responsibly for different reasons: fundamentally different Value alignment. Investors want to ensure that the Many responsible investors believe that ESG criteria are investment decisions of the asset managers they appoint material to future business success and, ultimately, to comply with their ethical and broad societal values. This financial performance. But if it exists, there may not yet be motivation is most prevalent in Northern Europe but it is enough evidence of such a relationship. Relying on ESG gaining traction in the US as well, as indicated by a recent therefore could be seen as an act of faith that desirable 7 survey on attitudes to wealth investing . corporate behaviour should be beneficial to investors over Risk management. Environmental, Social and Governance the long run. (ESG) considerations capture non-financial information The three individual elements of ESG differ in nature: that could affect financial performance. These can be as • Governance is an indication of how well-governed a diverse as scrutiny of corporate management and concern corporation is and the extent to which the primacy for strong governance to protect shareholders, work of shareholder interest is ensured. It can be seen as a practice considerations, or fear of global warming and measure of management quality. hence a preference for activities that have a low carbon footprint. • By contrast, the Environment and Social variables capture The different investment objectives – value alignment and the risk and opportunities that are often specific to financial performance – require changes to the relationship the industry and the activities of a company. The link between investor and investee. Financial data such as between E and S and future performance is therefore accounting statements are no longer sufficient to fully indirect. assess the nature and business prospects of a corporate While many investors agree that Governance has a link to investment in a changing environment. It becomes performance, there is less consensus on the importance necessary to identify and consider material, non-financial of Environment and Social attributes. A Barclays survey of drivers of business success as well. large asset managers in 2016 indeed found that they often So there is a need for additional information to describe have different views on the importance of E, S and G than the risks posed by negative factors, such as when the asset owners. The research showed that asset owners activities of corporations impose a cost on the broader find Environment more important, while managers see public through pollution, for example. It is necessary to Governance as more relevant to financial performance. relate these risks to corporate behaviour and organisational ESG indicators also play different roles depending on the processes which directly or indirectly affect the type of company and its geography. For example, the risk corporation’s sustainability. of pollution and environmental damage is important in Indeed, corporations that negatively impact society the chemical industry but not very relevant to the financial may ultimately face adverse changes in their operating sector, where governance and social factors may be much environment, due to regulatory action for example. ESG more relevant. addresses the need to supplement traditional financial Within industries, large variations can exist according to reporting with a broader, all-encompassing assessment of the business model and structure of individual companies. sustainability and can therefore reflect a holistic attitude to There is at this stage little standardisation of the selection risk management on a long horizon. of and weight attached to various ESG metrics in different industries. Disclosure of ESG-relevant information by issuers is mostly 7 In the 2016 U.S. Trust Insights on Wealth and Worth® by the US Trust Bank voluntary at this stage, but there is a strong appetite from of America, Millennials are more than twice as likely to consider investment investors for defining new, expanded, reporting standards decisions a way to express personal values than older generations. See http:// www.ustrust.com/ust/pages/insights-on-wealth-and-worth-2016.aspx that would be made mandatory and help investors form 12