Challenges and opportunities within the ESG space

Challenges and opportunities within the ESG space

As consumers, we’re more aware of the environmental and social
impact of our consumption than ever before — and today, this awareness impacts
how many people invest. It’s been two years since Invesco Unit Trusts launched
our ESG
Opportunity strategy
. Since that time, the growth and attention around ESG (Environmental,
Social and Governance) investing within investment communities has continued to
progress at a tremendous pace. Assets in the United States grew 38% between
2016 and 2018,1 and 2019 appears to be no different. Yet as with
many things that grow quickly, there can be growing pains, as well. In this
blog, we’ll explore some of the challenges and opportunities that Invesco UITs
has uncovered within the ESG space.

What ESG challenges
have emerged in recent years?

Today’s ESG investors face a few recurring challenges:

  • “Green-washing.”
    Some critics have argued that the significant growth in ESG assets is due to
    green-washing (i.e., when an asset manager uses some level of ESG data to
    aggregate an ESG score for their strategy or fund, with little effort to truly
    understand or integrate ESG into their investment framework). Fortunately, we’d
    argue this practice is becoming less common as investors grow more informed
    about the ways asset managers are implementing ESG into their investment
    process. For example, due diligence questionnaires no longer have a mere ESG
    box checkbox, but instead include thoughtful questions to understand the ESG
    process and stakeholders, third-party partnerships and the ways additional data
    is leveraged.

  • Inconsistent
    ESG disclosures.
    Another challenge involves the inconsistent ways companies
    disclose information about their environmental, social and corporate governance
    practices, which are not always comparable across corporations. On the positive
    side, we’re thrilled that companies are reacting with transparency to investor’s
    requests for ESG-related information — information that’s fundamental to
    assessing some of the risks that they face. However, it can be difficult to
    determine how one company’s ESG information compares with another’s. One of the
    most common solutions is to use a dedicated research firm or team to aggregate
    the data into something comparable and quantifiable, often with a score and key
    findings about a corporation’s ESG practices.

  • Education
    Finally, asset managers continue to face a challenge that we
    encountered two years ago when the ESG Opportunity strategy launched: the
    education gap. With so many different approaches falling under the umbrella of socially
    responsible investing, it’s imperative that asset managers’ intentions align
    with investors’ expectations. We feel that this presents a unique opportunity
    for asset managers, financial advisors and investors alike to build a
    meaningful investment dialogue around the purpose of ESG investing.

What are some of the
opportunities that exist in the ESG space?

There are two sides to the opportunities that exist within
the ESG context: the asset managers/investors and the companies in which they
invest. In April 2006 the United Nations launched the Principles for
Responsible Investment (UNPRI) based on the idea that ESG issues should be
considered part of the investment process, as they can influence investment
returns. Currently there are 2,450 signatories to the UNPRI, nearly 20% of whom
have been added over the last 12 months. Merely becoming a signatory doesn’t
qualify someone as an ESG manager, but it’s the first step in beginning to
align the investment framework with some commonly agreed upon principles.

There are opportunities on the corporate side as well. As
mentioned above, we believe the primary opportunity comes through developing
clarity around what is (or isn’t) being reported. Much like the Generally Accepted
Accounting Principles (GAAP) pioneered by the Financial Accounting Standards
Board, responsible investing has seen the emergence of the Sustainable
Accounting Standards Board, which was established to provide a commonly agreed
upon set of reporting standards that are applicable within a company’s

Where is the interest
in ESG coming from?

Millennials are often cited as the generation with the greatest desire to align their values with their investments. According to recent research from Morgan Stanley, that’s true, but interest outside of that generation is actually growing at a slightly faster rate.2

A recent survey by Morningstar showed significant interest
from Generation X in ESG investing. With most Baby Boomers firmly into their
retirement years, their interest has moved toward preserving their savings.
However, as Generation X lands squarely in “peak savings” mode, their conversations
around ESG investing are likely to increase.

Final thoughts

Amid the growth seen around ESG, one thing remains clear: Investors
want to understand a company’s long-term value creation plan, initiatives, best
practices and any inherent risks (both financial and non-financial) via more
standardized information around ESG. Management teams at publicly traded
companies appear to have gotten the message that investors want more ESG-related
information — but it is still up to the investors to determine how they use that information.

At Invesco Unit Trusts, we believe that failure to incorporate
analysis of ESG characteristics into the investment process overlooks ESG’s
potential effect on long-term investment performance, as well as investors’
desire to invest according to their values. We expect the growth in assets and
interest around ESG investing to continue in the years to come. With that
growth will come new challenges and opportunities, but ones that we will lean
into rather than shying away.

1 Source: US SIF Foundation, “Sustainable and Impact Investing —
Overview,” October 2018

2 Source: Morgan Stanley Institute for Sustainable Investing,
“Sustainable Signals: Individual Investor Interest Driven by Impact, Conviction
and Choice,” September 2019


Blog header image: Jeff Wasserman / Stocksy

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An issuer may be unwilling or
unable to declare dividends in the future, or may reduce the level of dividends
declared. This may result in a reduction in the value of your Units.

The financial condition of an
issuer may worsen or its credit ratings may drop, resulting in a reduction in
the value of your Units. This may occur at any point in time, including during
the initial offering period.

You could experience dilution
of your investment if the size of the Portfolio is increased as Units are sold.
There is no assurance that your investment will maintain its proportionate
share in the Portfolio’s profits and losses.

The Portfolio invests in
securities of companies demonstrating favorable ESG practices. The companies
may not have applied favorable ESG practices in the past and there is no
guarantee that the companies will continue to apply favorable ESG practices
over the life of the Portfolio.

10/19                     NA9506

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