The European Union has earlier this month passed a directive concerning pension funds called “Institutions for Occupational Retirement Provision II”. It requires all pension funds – some EUR 2.5-3 trillion of assets – to include environmental, social, and governance risks and policies into their investment strategies, giving them the same level of attention as liquidity, operational and asset considerations. This ESG focus specifically includes climate change, resource use, and stranded assets as factors for attention. EU member states have 18 months to codify the new rules into national law, so this should be in effect by the second half of 2018.
This marks another advance in the global rise of sustainable investing. As of year-end 2015, over 20% of US professionally managed funds – some USD 9 trillion – was invested according to sustainable, responsible, or impact strategies.
Last year, a Deutsche Bank/Hamburg University meta-analysis of over 2000 empirical studies found that the majority of the time, there is a positive correlation between ESG standards and corporate financial performance. So there is growing evidence that such criteria are consistent with the traditional fiduciary duty of maximising risk-adjusted returns.
The challenge for investors and analysts is to become as familiar with ESG criteria as they are with financial parameters like ROE and EV/EBITDA. The process is ongoing. Like electric cars, it is coming into the mainstream faster than most would have thought just a few years ago. Funds focused on Vietnam would be well advised to be at the vanguard of this global trend.
Mekong Man & Ezra Vontobel