Assets globally that are invested in accordance with environmental, social and governance (ESG) principles, or sustainable investments, have been growing 17% per year and now stand at $23 trillion. The growth of US ESG assets in particular is up over 200% from the past decade. As institutional investor demand for ESG products mounts due to robust ESG performance and stakeholder pressure to address global challenges, banks and business schools alike should offer mandatory sustainable investing training to meet the demand for financial services professionals who understand sustainability. Naturally, this need for training also applies to impact investing, the smallest sustainable investing approach in terms of amount of capital deployed at 1% of total sustainable investment AUM.
Reaching New Heights: Investor Demand for ESG Investment Products
The reasons for heightening investor interest in sustainable investing are manifold—this article will focus on two before moving on to constraints.
First, growing evidence of the relationship between corporate ESG performance and long-term financial performance is attracting investors to ESG products. This evidence ranges from practitioner and academic research to first-hand investment experience. For example, a recent BCG study showed that top ESG performers attained 3% to 19% higher valuation multiples than did median ESG performers. In addition, a recent Harvard Business School working paper concluded that even public sentiment momentum about a company’s sustainability activities affects the price that investors are willing to pay for sustainability. Moreover, 68% and 69% of asset owners believe that integrating ESG factors significantly increased returns and reduced volatility, correspondingly. Asset owners include pensions, insurance companies, sovereign wealth funds, and endowments and foundations.
Second, stakeholders are more likely to pressure institutional investors to address global challenges, such as the UN’s Sustainable Development Goals (SDGs) and climate change. To illustrate, a broadening array of stewardship codes (Canada, Brazil, Malaysia, and South Africa, inter alia) call for asset owners and asset managers to integrate ESG factors. Similarly, the Asset Owners Disclosure Project highlights investors’ management of climate-related risks and drives change through advocacy. Asset owners, in turn, request ESG products from asset managers. As a result, asset managers have responded by hiring dedicated ESG specialists to help integrate ESG factors into existing investment processes and products and launch new ESG-specific products.
As Easy as ESG: How Banks and Business Schools Can Meet Investor Demand
While more than a quarter of professionally managed AUM integrate ESG factors, over three-quarters of institutional asset owners feel responsible to invest sustainably. “To [capitalize on the opportunity that this gap represents and] scale sustainable investing, banks should expand sustainability training,” explains Yana Kakar, Global Managing Partner of development consultancy Dalberg Advisors. Specifically, banks should train industry-focused investment bankers, institutional salespeople, and high net worth relationship managers.
While there have not been studies on investment banker and institutional salesperson sustainable investing training, a new study on European private banks found that sustainable investing training for high net worth relationship managers is mandatory in only half. Of that half, only four provide dedicated compulsory sustainable investing training.
Although dedicated sustainable and impact investing specialists within banks who understand how ESG integration works and share that knowledge is certainly helpful in developing sustainable investment products, training is critical to weave ESG investing into the fabric of mainstream capital markets and achieve scale. One simple approach could be to offer ESG integration training as a short mandatory module in all investment banking, investment management, and capital markets analyst and associate onboarding training programs. For example, it would be relatively straightforward to include a short session on ESG integration when teaching incoming analysts and associates about equity and fixed income valuation.
ESG leaders have compiled their expertise into the UN-supported PRI’s fixed income and equity ESG integration research pieces, which explain how to integrate ESG and highlight best practices through case studies. The PRI is the world’s leading proponent of responsible investing. Prospective PRI signatories review these guides when considering whether to becoming signatories. Using PRI or other guides, bank training programs for newly minted college and business school graduates could teach how ESG factors affect company valuations via the levers of revenues, operating margins, capital spending, asset values, and risk; as well as how sustainability issues affect fixed income prices.
Educating Sustainable Investing Leaders Who Make A Difference in the World
Teaching sustainable investing as part of core finance curriculum at business schools could also help to mainstream ESG, impact, and other types of sustainable investing. A number of business schools offer sustainable investing electives. For example, Professors George Serafeim and Rebecca Henderson at Harvard Business School teach the popular elective course “Reimagining Capitalism,” which includes using the UN Sustainable Investing Goals as a framework for private equity investing. Meanwhile, Columbia Business School offers an elective impact investing seminar at Columbia Business School, and Wharton alone has 46 social impact courses across undergraduate and graduate programs. Such electives should provide students who are interested in sustainable investing with the tools, skills, and perspectives that need to drive incremental progress in the field.
However, including ESG integration and other sustainable investing approaches in discounted cash flow and bond math case discussions and problem sets of business school core curricula is more likely to drive a sea change in the field. Indeed, if all investing is to become sustainable investing, the broad range tomorrow’ business leaders will need to understand sustainable finance.
Note: Bhakti Mirchandani teaches her own impact finance class in Columbia’s Masters in Sustainability Management Program.