Financial professionals put assumption of ESG’s exclusively long-term significance under the microscope
While critics question the value of responsible investing, its supporters have consistently pointed to studies suggesting that ESG factors drive long-term returns. What’s left unsaid is that they matter less for the short term-focused investor — but even that view is being challenged.
“One point often made is that conventional financial factors have an overriding influence on prices, especially in the short term,” wrote Matt Orsagh, a director of capital markets policy at CFA Institute, in a recent blog post.
Reporting on the joint CFA Institute – Principles for Responsible Investment (PRI) workshop series on ESG integration, which involved participants from around the world, Orsagh noted how short-term returns were said to be driven more by factors such as supply and demand, sentiment, financial news, and quarterly results.
But participants from several jurisdictions maintained that ESG factors also have a near-term impact on share prices and bond prices. One view held that the long-term upside from ESG effects come from “a series of incremental upticks” that add up over time.
A massive ESG risk-driven collapse, it was also argued, could be just a case of the proverbial last straw breaking the camel’s back. Benjamin Yeoh, CFA, senior portfolio manager at RBC Global Asset Management, was cited with his commentary on the collapse of Carillon:
“Carillion, which went bankrupt, you actually died a death of 1,000 cuts over the three years preceding that,” he said. “You could talk about whether it was culture or all of those other things, but if you crystallize a lot of the problems as being on the ESG risk side of the matter, then actually you had a long, drawn out, multi-year destruction of value before we had a very abrupt complete destruction of value.”
Orsagh also highlighted the increasing coverage of ESG investments in the mainstream media, which is slowly eroding the argument that it takes at least three years before environmental and social (E&S) factors can influence market prices.
A 2017 survey of 1,100 CFA Institute members found 23% believing that both E&S issues had often or always affected share prices for that year, while 52% and 46% thought that environmental and social issues, respectively, will often or always affect share prices in 2022.
But Rob Wilson, research analyst at MFS Investment Management, said that E&S factors can quickly move from being forecast as relevant in the long term to having immediate repercussions:
“My thesis in 2014 was that over the next ten years these ESG issues [around drug pricing and H1B visa risks in the U.S.] were likely to become important, but all of a sudden, within a year and a half, these topics were big news from both a political and a regulatory standpoint … Over the years, I’ve seen similar outcomes on tax, technology ethics, and other environmental and social topics.”
The growing evidence indicating that ESG factors are becoming more immediate, Orsagh suggested, could be a relief to investors who hesitate to consider them because they believe the factors are irrelevant to their short-term investing horizons.
“[Certain] investors are spending a lot of time identifying which ESG factors are material and predicting when they will be material — will it be in within one year’s time, two years’ time, or five years’ time?” he wrote. “Because the timing of ESG events is difficult to predict, these investors argue that ESG integration is invaluable for all investors, especially as ESG factors are considered to increasingly affect market prices in the short term and long term.”
