ESG and investment returns
We view ESG issues as an important factor in evaluating the expected risk and return from investments, particularly equity investments.
It can be as important as well-known academic factors like growth, quality, or value in determining how investments perform in the long run.
Taking ESG into account may also help investors to understand the long-term risk and downside of portfolios. For example, many energy companies are likely to be left with large amounts of stranded fossil fuel assets if the world takes the Paris carbon emissions goals seriously, but this likelihood seems not to be fully incorporated into market prices.
In 2019 7IM signed up to the UN Principles for Responsible Investment (PRI), which influences how we view and manage our investment process and products, and how we deal with ESG and sustainability issues inside the firm. For us as investors, the crucial PRI principles are the first two:
Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
As signatories of the UN PRI we are required to report on the PRI principles, and this will form part of our assessment of progress and success in incorporating ESG into our investment process. We view the PRI requirements as complementing the UK Stewardship Code.