The scrutiny on investors to do better for the world – not just their stakeholders – is ever-present nowadays, creating a pressure neatly confined into one single buzzword: ESG.
But, as many firms around the world are starting to discover, the scope within ESG is as broad as it is important.
In 2012, Morgan Stanley's Jessica Alsford, who is now head of global sustainability research, launched a research team in the still "small, niche area" of sustainability, after hearing about the role while on maternity leave.
"Over the last eight years, my role – my objective – has been to build a research franchise," Alsford added, but writing research is only half the job.
"It has been really important to help our clients understand why some of these issues shouldn't be sidelined niche areas, but actually should be really instrumental and fundamental to the investment ideas that they are researching and… [where they are] deciding where to allocate their capital," she said.
In her conversations with clients Alsford witnessed an uptick in ESG interest from across the financial community, she explained. These included passive markets with "strong growth" on ESG ETFs or quant investors back-checking the ESG data to see which data might be useful to incorporate into their systematic strategies.
"Certainly even two years ago, it was more your long-term, long-only investors. Whereas, now the hedge fund community is really engaged with ESG," she said. "There's no part in the investing landscape that isn't looking at ESG," she added.
Moreover, Alsford – alongside chief sustainability officer Audrey Choi – has the immense task of ingraining ESG processes into the historic US bank. To do so, she has had to take sustainable finance outside the remit of research and into the wider bank.
One way she did this was by founding the bank's EMEA sustainable finance council, which she co-chairs, bringing together all the bank's sectors to "share their expertise to really embed sustainability into how all parts of the bank are thinking about their day-to-day job," she said.
With this platform, Alsford instills her ESG philosophy: "I think about it as: process versus product," she said.
"So the process is – whatever your investment style – you need to be thinking about: What are the EU plans around the carbon price and how does this impact or change the risk if you're investing in high carbon intensive sectors, for example. Or looking at diversity, we've shown how if you have a more gender diverse workforce, they tend to outperform their less diverse regional and sector peers," she explained.
She believes the process of ESG needs to be put into the core investment process, rather than being an add-on.
"From a product perspective, ESG sustainability is a starting point to reduce that universe of issuance to what you might want to invest in. That might be a thematic fund or from a perspective of wanting to invest in best in class or in improvers, but it's either at the beginning or in the middle - definitely not at the end," she added.
The broad scope
The beauty of ESG's multi-dimensional coin is that each brings its own approach and style, now expanding across all multi-asset classes, she explained.
Bonds, for example, have been one of the biggest changes, with the development of ESG-labelled bonds.
"I think what has been particularly important about ESG labelled bonds is that you can clearly see where and why those proceeds are being made," she said. "By labeling bonds and structuring bonds around specific green projects it's actually helping to accelerate the allocation of capital towards green businesses," she added.
Moreover, the most "stark" change has been in social and sustainability bonds. "The social side has always been a little bit forgotten within ESG, not because there's not an interest there, but just it's harder to define and to quantify because there's less data around it. Clearly with COVID, it's been one of the reasons why you've seen this increase in those social bonds," she added.
Four key themes to keep an eye on
Renewables and EV's have been a huge part of the push towards scalable sustainability but there are two other technologies that will play a role: carbon capture and hydrogen.
"If you look at the fact that we've got to reduce… emissions from about 57 gigatons down to net zero in thirty years, our analysis suggests that it's going to be very, very difficult to see how you get there without using CCS technology," she added.