More evidence is emerging that suggests paying heed to environmental, social and governance issues is not just the right thing to do - it makes investment sense.

The importance attached to environmental, social and governance practices by firms is increasingly seen as a necessary investment test along with financial metrics such as revenues, valuation or profits. “Green” asset allocation ideas are also gaining ground.

According to a survey of US asset managers by Cerulli Associates, the analytics firm, a rising percentage of asset managers look at ESG factors alongside more traditional financial tests to identify opportunities and risks. 

"A growing percentage of asset managers proactively consider ESG factors in conjunction with financial analysis to identify risks and opportunity when investing in companies and evaluating their business practices," said Michele Giuditta, associate director at Cerulli. "Although many firms have adopted ESG principles, determining how to implement them remains a work in progress."

The Cerulli report adds to studies saying that taking non-financial factors into account makes good investment sense and does not cut returns. The subject remains controversial – a firm that is well-governed and managed might operate in sectors that draw frowns, such as tobacco and firearms, for example. A number of studies seem to bolster the “doing well by doing good” approach, however. According to a recent report by Boston Consulting Group and MITSloan Management Review, investments that deliver financial results are closely correlated with those that are deemed sustainable (Investing For A Sustainable Future, 11 May, 2016). Separately, a study by Barclays found that investment-grade bonds with higher ESG scores outperformed those with low ESG scores between 2007 and 2015 (source: MSCI).

Uptake of ESG-influenced investment varies by region. In Asia, adoption has been relatively slow, although it is growing. According to the Global Sustainable Investment Alliance, out of all ESG-related investments, worth $21.4 trillion in 2014, Asia accounted for $53 billion, but with a 32 per cent growth rate (source: GlobalCapital.com). This year, the Hong Kong Exchange introduced a compulsory “report or explain” for listed companies on their ESG policies. The Singapore Stock Exchange has launched sustainability indices. Heading West, there are sustainability indices operated, for example, by the FTSE Index business, such as its FTSE4Good Index Series.

More than half of consultants polled by Cerulli said they have dedicated resources for ESG manager research, and others are considering adding resources. Cerulli urges asset managers who are not taking ESG criteria into consideration to re-evaluate this decision. 

"Institutional investors are taking ESG considerations seriously and making hiring decisions based on asset managers' and consultants' ESG resources and capabilities," said Giuditta. "Survey data confirms that investors are becoming more ESG-aware. Investor demand is the top reason why alternative investment managers are taking ESG issues into consideration." 

An example of how environmental considerations are increasingly driving investment came recently from The Fourth Swedish National Fund, or AP4, which has $35 billion assets under management. It is allocating 21.8 per cent, or $3.2 billion of $14.7 billion as of 1 June 2016, of its global equity portfolio to low-carbon strategies. It also pledged to decarbonise its entire global equity portfolio by 2020 (source: MSCI.) This is the largest pledged allocation to a low-carbon investment area of its type, MSCI said in a report. Late last week, CalSTRs, the US teaching union, said it was allocating $2.5 billion of its $188.8 billion portfolio to low-carbon strategies in the US.