Module 4

Responsible investing across asset classes

The European
Federation of
Financial Analyst
Societies
Sophienstraße 44,
60487 Frankfurt am Main
[email protected]
www.effas.com
Learning objectives

This module concentrates on different investment assets and the different ESG-considerations for each asset class.

The learning objectives are:

§ Having an overview of the different asset classes and their unique perspectives on ESG.
§ Understanding how ESG-strategies can be developed according to different asset classes.

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Agenda

4.1. Introduction
4.2. Brief reflections on individual asset classes
4.3. Developing an ESG-aware investment strategy

ESG in different asset classes Page 3

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4.1. Introduction

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4.1. Introduction
RI Assets in Europe: Allocation across the main asset classes

• We need to distinguish the Global ESG Funds by Asset Class (USD tn)
empirical question of how
Responsible Investment (RI)
assets are currently distributed
across the different asset classes
from the ex-ante asset allocation
perspective.
• At the end of 2021, more than
half of the capital invested
worldwide (50.3%) was in
equities. 22.1% was invested in
fixed income.
• Only a small portion was
invested in alternatives.

Source: Refinitiv Lipper (2022).

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4.2. Brief reflections on individual asset classes

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4.2. Brief reflections on individual asset classes
ESG in Equity

Listed Equity:
§ Asset class having the longest history of ESG integration. It continues to exhibit the highest penetration rate and the highest level of
sophistication across all asset classes.
§ All integration approaches can be found in principal, with exclusions (norms-based and others), engagement and voting as well as
integration being the most widespread (see Eurosif, 2018).
§ Focus on the secondary market prevents this asset class from being well suited for impact investments that are mainly driven by use-of-
proceeds considerations.
§ Use of ESG ratings is common practice and integration of ESG information in the fundamental analysis is becoming more important.
§ Integration approaches have increasingly become accompanied by engagement efforts and materiality map analysis.
§ Passive and semi-passive products do exist and are able to show quite long track records.

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ESG in Equity (cont.)

Private Equity:
§ The Private Equity market has increasingly embraced ESG integration over the recent past (see Eurosif, 2016, 2018).
§ According to PwC, integrating ESG considerations have become the norm in the industry (see PwC, 2019, and following slides).
§ Reasons for this can be seen on the thematic side (carbon as a key issue, for example), but, certainly more importantly, the general
trend and pressure on the universal owner side to roll out ESG across all parts of their portfolios.
§ There seems to be an increasing conviction in the industry that ESG integration generates financial value and allows for better risk
management in the due diligence and investment processes.

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 Key influences for ESG integration

4.2. Brief reflections on individual asset classes

Excursus: RI in Private Equity

§ The 2021 PwC Global Private Equity Responsible Investment Study is built upon 209
respondents from 35 countries.
§ Shift in attitude towards ESG integration, as PE firms are now more proactive. In
comparison, in 2019 the main driver for ESG integration was risk management. Risk and business considerations
§ ESG considerations have become widespread: 65% have developed a responsible
investing or ESG policy, as well as tools to implement it.
§ In regard to climate risks, 47% of respondents currently do not undertake actions to
better understand their portfolios’ exposure to climate risks.
§ Nonetheless, a gap remains between concern and action on ESG issues. In some areas,
where governance concerns have been known over a long period of time or where
regulations are already in place, the gap is smaller.
§ Firms rethink their purpose by aligning with the SDGs: 38% identify and prioritize
relevant SDGs at the company portfolio level; 32% at the PE house level; and 26% at the
fund level.

Source: PwC (2021).

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Excursus: RI in Private Equity (cont.)

§ 47% of respondents said that poor ESG performance has Relative importance of subject areas based on positive responses
either led to material discounts in their valuations of a target
company or led them to not invest in a company.
§ Human Rights issues area of concern: 76% of all respondents
express concern about Human Rights risks on a portfolio level
(vs. 48% in 2016).
§ Public reporting and investment decisions and pricing have
gained the most importance among respondents (compared
to 2013).
§ Policy and tools, and monitoring and reporting had the
highest importance among respondents (in 2021).

Source: PwC (2021).

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ESG in Corporate Bonds

§ ESG in Corporate Bonds is quite similar to Listed Equity.

§ The use case on the integration side, (in the narrower sense), is somewhat limited due to the fixed income characteristic and the less
stringent link between ESG factors and return-upside potential. The shorter the term to maturity, the less relevant the long-term ESG
considerations are from a financial perspective. ESG factors remain relevant as drivers of financial risks, as is the reputational one, for
example. (see EBA, 2021).
§ ESG integration approaches are less widespread than in listed equity, but they have grown significantly in prevalence and importance
(see Eurosif, 2018).
§ ESG issuer-ratings have a significance that is comparable to the listed equity space. Credit ratings have begun to embrace ESG factors
more broadly and systematically in recent years (see PRI, 2017a).
§ Actively engaging with investee companies has also become a trend supported by soft regulation, such as the UK stewardship code.

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ESG in Sovereign Bonds

§ Around one third of all assets under management in the bond market are in sovereign bonds (see Eurosif, 2018).
§ The typically applied approaches here are exclusions, especially norms-based exclusions linked to the most material governance and
social factors
§ They are partially incorporated in credit-rating models and valuations.
§ Environmental pressures become increasingly material for sovereign issuers.
§ ESG country ratings do also play a role and are used as inputs into investment processes.
§ The biggest challenge for large institutional investors is that norms-based exclusions of reserve currencies (USD, Euro, Yen, etc.) are in
practice virtually impossible to implement without generally accepted consequences.
§ Sovereign Engagement is more difficult than for corporates.
§ Framing sovereign engagements around existing international commitments and frameworks that sovereigns have already ascribed to
(SDGs and the Paris Agreement) can be used to facilitate engagement discussions and minimize potential pushback.

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ESG Criteria in Bonds

§ In general, ESG Bonds can address the single subcategories of

ESG. Sustainable fixed income marked issuance (2017 – H1 2022)
§ Over the years, most bonds focus on green topics, although
the share of sustainability and social bonds is increasing.
§ Social bond market showed a more than 10-fold increase in
2020.
§ Here, China was responsible for 77% issuance in the
Asian-Pacific region.
§ In H1 2022 there was a 27% year-on-year decrease against H1
2021.
§ The Russian invasion of Ukraine in February and
subsequent European energy crisis exacerbated post
COVID-19 inflation impacting bond market dynamics.
Rising interest rates and high volatility resulted in
decreased bond issuance.

Source: CBI (2022).

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Green Bonds

§ The Green Bond (GB) market has boomed in recent years. Global Green Bond market by issuer types ( 2015 – 2021)
§ Development banks were the pioneers; corporate issuers followed;
and, most recently, sovereign green bonds have taken their place.
§ GBs provide a direct link between the financing side and the
investment side (targeted use of proceeds).
§ The scope of the market has grown and now also includes Social
Bonds and Sustainable Bonds.
§ Ideal-typically, GBs are designed as asset-backed securities (ABS), i.e.
the returns and risks are tied to specific underlying projects (green
infrastructure projects, for example). However, as of today, most Green
Bonds are not asset-backed.

Source: CBI (2022).

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Green Bonds (cont.)
Use of Proceeds (2014 – 2021)
§ Green Bonds offer the unique opportunity to invest in large-scale real-world
impact projects in a highly liquid market (CBI, 2019).
§ They allow impact investments to become mainstream, with larger portfolio
allocations of large institutional investors going into this bucket.
§ Advantage: a much higher level of (potential) impact can be achieved (as
compared to traditional impact investment vehicles).
§ The use-of-proceeds characteristic, together with their high potential
leverage, make GBs an instrument of choice for SDG-based investment
approaches.

Source: CBI (2022).

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Green Bonds (cont.)

§ The Green Bond Principles (GBP) and Social Bond Principles (SBP), as well as the Sustainability Bond Guidelines (SBG), have become the
leading framework globally for this asset category. All of them rest on four pillars:
§ (1) Use of Proceeds,
§ (2) Process for Project Evaluation and Selection,
§ (3) Management of Proceeds, and
§ (4) Reporting (see ICMA, 2018).
§ The first green bond was issued in 2007 by the European Investment Bank to fund climate-related projects. Since then, the global GB
market has witnessed exponential growth, reaching a total issuance volume of more than 1 Tn USD in 2020. In 2017, the French
treasury issued the first sovereign GB to fund the country’s energy transition project (see Eurosif, 2018).
§ Europe leads the way in the issuance market, supported by the European Green Deal and the regulatory effort (EU Green Bond
Standard).

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Green Bonds (cont.)

Performance:
§ One of the main advantages of GBs from an investment Spreads ( of EUR denominated corporate ESG bonds against non ESG
perspective is that their risk (typically) is no different from the corporate benchmarks (bps)
general issuer risk.
§ Negative spreads represent a premium (greenium).
§ Yields to maturity in primary markets have been under
pressure at times due to the strong interest in this market
segment.
§ Spreads of corporate ESG bonds against non-sustainable
benchmarks have stabilized since April 2021.

Source: AFME (2022).

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Recap. Module 2: Green Bond Standard

On 6 July 2021, the European Commission published its proposal for the EU Green Bond Standard (EUGBS).
On 20 May 2022, the Committee on Economics and Monetary Affairs published its report:

Wider scope Regulating the entire green bond market instead of establishing a specific
standard; transparency requirements for green-labeled bonds aligned with the
Reasoning Taxonomy, additional safeguards for no harm
Green bonds are needed for the
transition , but so far, no uniform New requirements All EuGBs need a verified transition plan in order to avoid greenwashing;
processes to identify adverse impact; no issuance from countries that are on EUs
standard for green bonds within the grey or blacklist of tax havens
EU exists
Stronger Fewer conflicts of interests for external reviewers; possible ban to issue EuGBs as
supervision sanction mechanism; investors have legal recourse in case issuer’s failure to
Next steps comply leads to depreciation of the bond
Proceeding with negotiations with
Increased Stronger transparency requirements, appearance of information prominently on
member states transparency for the first page of the EuGB Factsheet
gas and nuclear

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Social Impact Bonds

§ To be distinguished from Social Bonds. The first Social Impact

Bond was issued in 2010.
§ SIBs market has continued to be on the rise during recent years. Total number of SIBs per sector
A total of 235 bonds across 38 countries have been launched.
Up till August 2022, USD$ 462 million of capital was raised.
§ SIBs are currently concentrated in developed countries, with
only 23 impact bonds issued in developing countries.
§ Public-Private-Partnership: The aim is to improve a social
outcome through the collaboration of government, service
providers and external investors.

Source: Brookings Institution Global Impact Bond Database (1st August, 2022).

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Social Impact Bonds (cont.)

§ SIBs bring together impact investors, who are willing to cover the upfront costs and
assume the performance risk of a social or health programme, while assuring that the Issue areas (global, since 2010)
government (i.e. the taxpayers) will not pay for the programme unless it achieves the
desired outcomes. Appropriate outcome and success metrics are negotiated and agreed
upon between the government and the party responsible for delivering the outcomes
(see GS, 2014).
§ Main critique: Due to the complex financial and contractual mechanisms, SIBs may be an
expensive method of operating social programmes.
§ Due to their contingent payment structure, SIBs are more similar to structured products
or equity in terms of investment risk.
§ The PPP structure of SIBs seems to perfectly fit to the SDGs and the need to mobilise
private capital for a public good.

Source: Social Finance ( w. d.).

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Commodities

§ Due to their importance in institutional investors’ portfolios and their relevance with respect to many sustainable development issues,
commodities have been looked at from an ESG integration perspective as well (see On Values, 2011).
§ There are many challenges with regard to investing in commodities from an RI perspective:
§ One of them is that exchange-traded commodity contracts (on oil, gas, metals, agricultural products, etc.) have homogeneous,
substitutable goods as underlying. A differentiation within any commodity category is either not possible at all, or is only
possible if one looks at small and illiquid niche-markets such as sustainable cotton.
§ The most commonly used RI technique here is the exclusion of the most controversial groups of commodities, which is, of course, in
contrast to one of the main drivers behind institutional investors’ interest in including commodities in their portfolios (significant
diversification effects).

Source: Fidante (2018).

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Commodities (cont.)

§ Probably the most important driver behind exclusions is the reputational risk for investors. They can be dragged into controversial
situations linked to their investments in commodities, if their production or use appear to have unacceptable negative side-effects
(externalities).
§ Increasing environmental and social pressures require assessments identifying the relevant environmental, labour and Human Rights
impacts and risks to be conducted.
§ One prominent example is institutional investments in agricultural commodities and their potentially adverse effects on food prices and
food affordability. The fossil fuel divestment movement could be considered as another example.
§ An alternative of direct investments in commodities is to invest in companies that are engaged in commodity extraction and trading.
The advantage is that one can differentiate between good and bad practices and take resource scarcity considerations into account
from a thematic ESG investment perspective.

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Real Estate
Percentage of ESG Adoption Levels

§ Real Estate can have an impact through various perspectives:

rehabilitation of public spaces, affordable housing, social housing,
care centres, green buildings.
§ CBRE conducted a U.S. study on ESG in real estate, which outlined
that several criteria were already used.
§ According to the study nearly 70% already adopted ESG criteria in
the real estate investment process. This is a significant jump from
2021 when 56% of the U.S. investors indicated that they had Key Priorities of ESG
already adopted ESG criteria. Strategies
§ Of those who had adopted ESG criteria, 85% indicated that
protecting the environment was the primary goal. More than half
(56%) stated that the need to meet stakeholder targets was an
important factor in ESG criteria adoption.

Source: CBRE (2022)

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4.2. Brief reflections on individual asset classes
ESG in Hedge Funds Primary drivers for ESG integration among ESG-in
funds

§ Not many limitations for ESG integration into the investment decisions in principle,
besides the fact that hedge funds typically have investment horizons that do not
match well with ESG integration pay-offs (MAN, 2015).
§ An advantage of an ESG hedge fund set-up, on the other hand, would be that it
would allow for short positions in a portfolio and, hence, would allow investors to
potentially benefit from both ends of an ESG signal’s spectrum.
§ However, at the same time this feature is problematic as well, since it raises the
question about the moral soundness of such an approach.

Current state of ESG integration

Source: BNP Paribas (2020). Source: BNP Paribas (2020).

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ESG in Private Debt

§ In 2021, a growing number of impact private debt funds were established, suggesting that lenders wanted a voice in sustainability-
related loan features to both mitigate the risk of greenwashing and elevate positive impact (ELFA, 2021).
§ Similar to Private Equity, the biggest advantages of Private Debt are:
§ the investor is able to be selective and specific with regard to the use of proceeds
§ the investor has more direct controls and ways to engage with debtors.

§ Results of a 2021 survey by ELFAs show that private credit managers are increasingly incorporating ESG considerations into their
investment processes, driven in large part by end-investor demand for ESG data.
§ around 90% of respondents said they had refrained from investing in credit, downsized it, or divested it altogether in the previous
12 months for ESG reasons.
§ the results also show confusion in the face of regulatory trends, which reinforces the impact of the lack of ESG data .
§ while borrowers and private equity sponsors addressing these issues are willing to contribute ideas and solutions, the nascent data
collection, reporting methods, and reduced resources in the private debt markets present a particular challenge.

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Investing with impact – what does this mean?
Alignment, Integration and Impact
Formulating ESG related investment objectives:
• Alignment:
Independent of Return/Risk considerations
• Integration:
Concordance with Return/Risk
considerations
• Impact:
Intersection with Return/Risk considerations

Source: UBS/PRI/MSCI (2018)

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Main characteristics of ESG Investment objectives – Alignment

• Starting point and goal: Alignment of the portfolio with values, ethical considerations, societal & political norms.
• Main drivers: Fiduciary duty, transparency/reporting pressure.
• Typical ESG investment approaches: exclusion/divesting, positive alignment (mainly product-related); exclusions are still
by far the largest Responsible Investment strategy by AuM in Europe (18.7 trn Eur in 2019) and globally; the most
common exclusions by type are controversial weapons followed by Tobacco and Nuclear Energy.
• Objective: Reduced/zero exposure to controversial issues; alignment with societal goals (e.g. Sustainable Development
Goals, SDGs).
• Main purpose: Management of reputational risks.
• Disadvantage: Loss of influence on company/management in the case of negative screening/divestment.
• Advantages: Works for large asset classes; works with passive, low cost approaches.

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4.3. Developing an ESG-aware investment strategy
Implementation at portfolio level: impact of ESG considerations (illustrative examples) -
Alignment

• Asset classes/categories: don‘t invest in hedge funds, don‘t invest in commodities, ....
• Sectors/products: don‘t invest in tobacco, do invest in renewable energy, ....
• Countries: don‘t invest in countries that don‘t comply with international norms.
• Investment styles (Growth, Value,...): no impact/relevance.
• Positive alignment: SDGs as a common framework; invest in Renewable Energy.
• Active/passive: both, ETFs with negative screens available in abundance; smart beta approaches exist as well.

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Main characteristics of ESG Investment objectives - Integration (I)

• ESG integration (in the narrower sense) means Integrating ESG and fundamental
integrating ESG factors/considerations in security analysis
valuation models and in investment decisions from a
risk/return perspective.
• Main driver: empirical evidence that doing this can help
to improve the risk/return profile and to outperform (see
other chapters); fiduciary duty (obligation to take these
factors into account if material).
• Objective: Enhance financial returns, reduce financial risk
of an investment portfolio.

Source: Amundi (2022)

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Main characteristics of ESG Investment objectives - Integration (II)

• Challenges: data quality; integration of ESG factors into existing models; costs of additional research; market
(in)efficiency.
• Advantages: Integration can be meaningfully achieved across almost all asset classes/categories.
• Boundaries: The usefulness of integration approaches decreases with shortening investment horizons/terms to
maturity.
• Link to other objectives can be provided via an Active Ownership/Engagement approach.

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Implementation at portfolio level: impact of ESG considerations (examples) – Integration (I)

• Asset classes/categories: integration has limited value for securities with short terms to maturity (short-term debt);
hedge funds: the possibility to go short may help to increase the return potential of ESG integration approaches.
• Sectors: the materiality of ESG issues is different across sectors; e.g., carbon is more material to the oil & gas industry
than it is for retail; the most significant value of ESG integration, hence, varies as well and needs to be traded off against
additional research costs, for example.
• Countries: in principle, there are no geographic differences in terms of the usefulness of ESG integration. However,
certain ESG issues may be more material in some regions/countries than in others (more or less strict carbon
regulation, for example, or differences in water stress). This is more a question of an individual company‘s business
model exposure, rather than one at the country allocation level.

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Implementation at portfolio level: impact of ESG considerations (examples) – Integration (II)

Investment styles (Growth, Value,...):

• No difference in relevance in principle.
• With regard to Value, ESG integration may be achieved from the perspective of identifying hidden and overlooked
competitive advantages.
• With regard to Growth, ESG integration likely means to focus on the opportunity side by looking at sustainable products
and services that benefit from global trends (related to the SDGs, for example). In that sense ESG integration overlaps
with Thematic ESG investing.
• The link to momentum investing in its classical sense is not obvious. If a combination of (price) momentum and ESG
factors pay off, it is a purely empirical question. There is evidence that ESG momentum as a factor may yield favourable
returns on investments (see Sustainalytics, 2018).

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Implementation at portfolio level: impact of ESG considerations (examples) – Integration (III)

• Primary market/secondary market: no principle differences in the usefulness of ESG integration.

• Active/passive: by definition, ESG integration is an active management approach. However, investors may benefit from
superior risk/return profiles of ESG factor-based indices or structured investment approaches that take single ESG
factors into account in a mechanical/quantitative manner (could be summarized as “Smart beta ESG approaches“).
• Short-term/long-term: by their nature, ESG integration approaches are more focused on long time horizons, since the
issues that are typically addressed (such as climate change) are typically long-term in nature as well. However, this does
of course not rule out at all that ESG issues can become highly relevant from a risk/return perspective in the very short-
term (Diesel scandal, Deep Water Horizon, etc.).

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Investing with impact – what does this mean?

§ Illustrating the meaning of investing with impact: consider three investments with the same risk-return profile, as shown in the chart on
the left hand side.
§ These projects differ only with regard to the real-world impacts they have (positive or negative, see chart on the right hand side). An
impact investment would typically either seek to reduce/mitigate negative social or environmental impacts OR to even achieve positive
impact. In reality, negative and positive real-world impacts need to be balanced against each other (which can be quite a challenge).
Differentiating investment projects based on their real-world impacts

Source: PRI (2019).

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To redefine the purpose and to rethink the results

§ If a corporation’s statement of purpose is credible and committed to

profiting from solving problems, it builds trust and authenticity, as well
as loyalty in customers, employees, suppliers and communities.
§ The simple notion that a firm's purpose is "just making money" is
becoming out-dated. The novelty is to think of the firm’s purpose as a
generation of measurable and profitable solutions to the problems of
people and the planet, and not to profit from producing problems for
people or the planet (Mayer, 2020).
§ The British Academy proposes eight principles for business leaders and
policymakers. These principles help to set out the features of an
operating environment that will enable the delivery of those purposes,
while remaining flexible to a diversity of business models, cultures and
jurisdictions.

Source: British Academy (2019).

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Example: SDGs as a framework for the formulation of an investment strategy

What are the SDGs?

§ Follow-up to the Millennium Development Goals (MDGs).
The UN Sustainable Development Goals
§ There are 17 Sustainable Development Goals, with a total of
169 targets and over 230 indicators.

Risk, Return and Real-World impacts driving an investment strategy are

potentially affected or could be framed by using the SDG framework
(see PRI, 2017b).

Source: UN (w. d.).

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Example: SDGs as a framework for the formulation of an investment strategy (cont.)

Part of fiduciary duty... Sustainable Development Investments (SDI) Decision Tree

§ to align portfolios (public equity, fixed income) with SDGs;
§ to invest with real-world impact, guided by SDGs;
§ to integrate SDGs in asset allocation considerations from a
universal owner perspective.
§ Example: APG together with PGGM have developed a
methodology to identify investment opportunities linked to
13 of the United Nations’ 17 Sustainable Development
Goals (SDGs).

Source: PGG & APG. Sustainable Development Taxonomies (2017).

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Example: SDGs as a framework for the formulation of an investment strategy (cont.)

Five-part SDG outcomes framework for investors

Source: PRI 2020).

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Main characteristics of ESG Investment objectives - Impact (cont.)

§ Challenges: scalability, impact measurement and reporting.

§ Impact investments can be made across various asset classes/categories, e. g.
§ fixed income
§ venture capital
§ private equity
§ Some even consider Impact Investments as a separate asset class (based on how investment institutions organize themselves around
it).
§ Impact measurement: A key feature of Impact Investing is the commitment of the investor to measure and report the social and
environmental performance and progress of underlying investments.

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Implementation at portfolio level: impact of ESG considerations (examples) – Impact

Asset classes/categories
§ Impact investments primarily via alternative asset classes: private equity and debt instruments
§ Mainly because of a higher degree of control and transparency that can be achieved through use of proceeds and impact reporting.
§ Within the public debt space, a significant market for Green Bonds/Sustainable Bonds has emerged over recent years.

Sectors
§ Applicable in several different industries possible.
§ Priorities could be derived from the SDGs, e. g. housing, microfinance, and energy have historically been focus areas.

Geographic
§ Typically in developed countries, e. g. US, and Switzerland and the Netherlands within Europe, although the proceeds are either
invested domestically or in emerging/developing countries.

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Implementation at portfolio level: impact of ESG considerations (examples) – Impact (cont.)

Investment styles
§ Corresponding categories do not actually fit very well to impact investment approaches. It should be noted that important proposals to
create a shared framework have been proposed by a working group led by UNPRI - “A legal Framework for Impact” (2021).
§ If at all one could consider the fact that typical impact investment areas overlap with growth markets such as renewable energy, this
implies a closer link to growth investment philosophies.
§ Momentum style probably does not align at all with impact investment approaches.

Primary market/secondary market

§ Real world impacts can only be achieved by raising and steering capital into sustainable use of proceeds cases (primary market).
§ But also, liquidity considerations and exit opportunities are needed (secondary market).

Active/passive
§ By its nature, impact investing is an active investment approach.
§ However, investments in impact funds, that provide diversified portfolios, are also an opportunity.

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Implementation at portfolio level: impact of ESG considerations (examples) – Impact (cont.)

Short-term/long-term
§ Impact investments are generally more long-term in nature as liquid public market investments.
Therefore, typically more time is needed to pay off financially.

Performance
§ First Impact Investing Benchmark in 2015 by Cambridge Associates and the Global Impact Investing
Network.
§ The Benchmark has exhibited strong performance contradicting investor concerns:
§ Over a 15-year period (2004 -2019), the benchmark returned 6.96% to investors versus 6.92%
for the comparative universe of the MSCI World (CA/GIIN, 2019).

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Impact Investing – Geo allocation

§ Among repeat respondents to both the 2019 and the 2016 surveys
(the latter reporting year-end 2015 data), aggregate impact AUM grew Changes in geographic allocations among repeat
from USD 52 billion to USD 98 billion, at a compound annual growth respondents (2015-2019)
rate (CAGR) of 17%.9.
§ The fastest-growing regions of investment were Western, Northern,
and Southern Europe (WNS Europe) and East and Southeast Asia (SE
Asia), which grew at 25% and 23% CAGR, respectively.
§ Growing interest in SE Asia is also reflected in the full sample’s
investment plans, as over half of respondents (52%) plan to grow
allocations to SE Asia over the next five years. The same share of
respondents intends to increase their future allocations to SSA.

N=79; figures is USD millions. Source: GIIN (2020).

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4.3. Developing an ESG-aware investment strategy
Impact Investing – The impact class spectrum

Source: Mercer (2022).

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Impact Investing – What impact categories are targeted by asset owners?

§ The impact categories investors are interested in are climate (78%), real estate (72%), and energy (67%)
§ There is less focus on addressing social challenges, most cited are diversity and inclusion (50%) and access to basic services (39%).

Impact categories targeted by asset owners

*Other includes land, oceans, and air.

Source: GIIN, 2021, Institutional Asset Owners: Approaches to setting social and environmental goals

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To what degree do Responsible Investors integrate ESG across different asset classes?

Percentage of PRI incorporating ESG factors in other asset classes (%)

Source: PRI (2022).

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Significance of RI approaches across different asset classes/categories1,2

Exclusion Norms-based Best-in-class Sustainability ESG Engagement Impact

screening themed integration & Voting Investing

Listed Equity
*** *** *** *** *** *** -
Corporate Bonds
*** *** *** * * * -
SSA Bonds3
** ** - * * - **
Green Bonds
- - - *** * * **
Private Equity
- - - *** *** *** ***
Real Estate
- - - *** ** - ***
Commodities
* * - *** - - **
Hedge Funds
- - - * *** * -
Private Debt
- - - * * * **
1Disclaimer: This overview table is for illustrative purposes only. The assessments made reflect the qualitative views of the author only;
2highlysignificant: ***, significant: **, relevant: *, negligible: -;
3Sovereigns, Supranationals, Agencies; these asset classes are specifically addressed in this module Source: Sustainalytics (2019).

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Impact Investing – Measuring Impact

A key feature of Impact Investing is the commitment of the

investor to measure and report the social and environmental The five dimensions of impact
performance of underlying investments.
§ Outputs: Direct impacts of an organization's activities.
§ Outcomes: Changes occurring as a result of the activities and
outputs.
§ Benchmark: Comparison against external performance data in
a particular sector.
§ Attribution: An understanding of what proportion of the
impact that occurred was caused due to your investment and
not other factors, e.g. market growth or participation of other
parties.
§ Additionality: Proof that impact would not have occurred had Source: Impact Management Project (2021).

your organization not made this investment.

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Takeaways

§ There are three distinct objectives within Responsible Investing: Alignment, Integration (in a narrower sense) and Impact. Typically,
large institutional investors exhibit a mix of these objectives, which, in combination with other, non-ESG related goals and preferences,
lead to distinct investment strategies and strategic asset allocations. No one size fits all solutions.
§ ESG purpose bonds have emerged as a liquid asset class within which investors can find opportunities to support their impact goals.
§ Green Bonds/Sustainable bonds are a new type of fixed income investment with a strong market growth over the last few years.
Particularly attractive for those corporates that are usually not on the target lists of best-in-class investors. For the investors these
bonds are attractive, because they widen the investable universe and their purpose can easily be communicated from a thematic
perspective. Key for the further development of the market will be transparency and standardisation.
§ Impact Investments can be seen as a new asset class in its own right. The global market shows continued growth, but is still
comparatively small in terms of AuM. The main motivation of investors is to achieve non-financial impact, although mostly expecting a
market rate of return. Output and outcome measurement plays a key role for this type of investments.
§ An ESG-aware strategic asset allocation that reflects all three main ESG objectives would deviate from the market portfolio or mean-
variance optimized versions of it mainly by an overweight position in alternative asset classes allowing for targeted impact and better
control mechanisms.

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Takeaways
How well is the Asset Management industry doing?

§ A large part of the institutional money is managed externally, i.e. not

by the institutional asset owners themselves.
Asset Management industry – where does it stand?
§ Therefore, several governance problems arise, while the integration
of ESG enhances complexity.
§ Mercer, an investment consultant, has rated the global Asset
Management industry‘s current state of ESG integration:
§ ESG integration is advanced in some alternative asset
classes/categories, e. g. infrastructure and impact
investments.
§ For the two main liquid asset classes, listed equity and fixed
income, the results show that the ESG integration is not yet
fully mainstream.

Source: Mercer (2020).

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Takeaways

§ The Sustainable Development Goals (SDGs) have begun to play an increasingly significant role in RI. They provide a common framework
and language that can be used for communication and reporting purposes, and helps to structure and align the efforts of the financial
sector to support their achievement. As a tool, the SDGs are mainly useful in the context of Alignment and Impact approaches. Their
value for ESG integration in the narrower sense is more limited, although they certainly provide guidance for investors with regard to
promising areas of innovation and growth.
§ Engagement approaches can create coherence between Integration and the two other ESG related investment objectives, Impact and
Alignment. For example, if the main objective of an investor is to integrate ESG factors from a risk/return portfolio optimization
perspective, the investor can still engage with the company to support an alignment with SDGs.

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