In a research note entitled Investing for the future, global consultancy Watson Wyatt points to academic research that has found positive correlations between environmental, social and governance (ESG) factors and financial performance.

Primarily motivated by value creation 

Jane Goodland, investment consultant at Watson Wyatt, said that the belief that ESG factors could damage returns has, in the past, rightly restricted the extent to which fiduciaries included these in their investment strategies.

She explained that the modern genre of sustainable investment, which is now primarily motivated by value creation and supported by academic research, is encouraging more pension funds to pursue this approach.

According to the firm, pension funds are also taking a longer-term view in recognition that an emphasis on short-term outcomes can be detrimental to the pursuit of long-term investment goals.

In addition, it believes that the economic landscape is being affected by sustainability issues such that it is becoming more difficult to take a long-term view without considering their impact on future returns.

Enhance investment analysis and decision making 

Goodland said that with the pursuit of sustainability firmly on the political and public agenda a tipping point has been reached and added that the investment community’s response is evolving rapidly.

She pointed out that there are now interesting strategies available, which enable investors to enhance investment analysis and decision making, exploit growth opportunities and exert shareholder opportunities.

In the research note, the firm identifies a number of implementation strategies for various asset classes.

The integration approach typically involves equity fund managers incorporating sustainability factors into investment analysis to identify risk and opportunities outside the limits of conventional analysis.

Satellite portfolio

Sustainability themed mandates when used as a satellite portfolio could provide a source of uncorrelated returns. Examples include climate change funds, ‘green’ real estate funds and clean technology funds.

Engagement uses shareholder powers to influence company management around ESG issues and could affect the firm’s performance and future prospects.

Goodland said that fiduciaries that are interested in this area should first enhance their knowledge and explore their sustainable investment beliefs before developing a sustainable investment strategy which might use one of these approaches.

“Importantly, their chosen approach should be commensurate with their governance level and long-term investment objectives,” she concluded.

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Related links 

• Watson Wyatt
• Research note