Morningstar - Q4 2022 - 40

Spotlight: Here to Stay
Survey Shows Politicization of ESG
The PitchBook 2022 Sustainable Investment
Survey attracted a record number of
respondents-up nearly 20% over 2021-with
allocators, asset managers, and service providers
weighing in on ESG and impact investing.
The increase in respondents appears to be at least
partially attributable to a wave of people
who, to put it politely, are skeptical of the merits
of these topic areas.
Looking strictly at how the proportions have
shifted from 2021 to 2022, a casual glance
would indicate that there has been a drop-off in
support for sustainable investing.
In 2021, only 9% of respondents said they have
no plans to incorporate any sustainable-investment
work. That number jumped to 13% this year.
When allocators were asked if they evaluate
a fund manager's implementation of an
ESG risk factor framework as part of their due
diligence process, 22% said they have
no plans to do so-up from 15% last year.
So, are the numbers of anti-ESG individuals
truly growing? Are they convincing last year's
supporters to shift?
I have my doubts.
Even going back to the first of these reports
two years ago, I suspected that those who
had taken the time to respond to this lengthy
survey were those passionate or positively
interested in learning more about the subject.
We now appear to be attracting a broader
audience to our survey as those supporting
anti-ESG initiatives, particularly in
the U.S., feel compelled to register their views
when they might have skipped the survey
in years past.
Our North American limited partners, in
particular, grew their proportionate
representation in the negative camp, but in
absolute numbers, those in the highly
positive camp have also grown in our survey
responses.
Attempting to represent various sides of the
debate, as many look for a survey to do,
we have always included quotes that represent
both positive and negative thoughts about
the sustainable-investment landscape.
This year, we had a much greater selection
of negative open-ended responses to
choose from.
In 2020, one person thought the need to register
extremely negative views on the topic. This
year, there were roughly 50 who did so.
But in terms of overall responses, these are still
a minority who are becoming more vocal.
I do not believe that this survey shows
an indictment of sustainable investing. The
numbers show continued support for the
topic, even in the face of a pandemic, social
movements, and financial stresses.
The negative views expressed were
often stated in repetitive soundbites, not
reasoned arguments.
This leaves hope for those with a deeper
understanding of the movement that education
might sway those who believe it is all-
to use the words of some of our respondents-
just a bunch of " woke socialistic
virtue signaling. "
Hilary Wiek, CFA, CAIA, is lead analyst, fund strategies
and sustainable investing, at PitchBook. The views
expressed here are her own.
While their framework provided the theoretical
foundation for value investing, this work has
continued relevance for the practice of security
analysis. Sharpe's CAPM reconceptualized risk,
distinguishing systematic and stock-specific risk.
Diversification can mitigate stock-specific
risk, so risk is ultimately addressable by investors
at the portfolio level.
By contrast, the concepts of systemic risk suggest
that there is an overarching context to investment
and portfolio construction that links financial
markets and the real economy. ESG investors seek
to understand how company valuations are
affected by system-level risks like climate change
and how the activities of companies, in turn,
contribute to those same system-level risks.
ESG investing is perhaps the most important
investment trend of the past decade, though
its roots go back much further. Notwithstanding
attempts to politicize the field, it is gaining
momentum and adherents because of its
commitment to address complex, large-scale
problems generated by economic activity.
On the premise that investing is more than simply
a technical exercise in portfolio construction,
investors are responding to the inability of a
business-as-usual approach to help ameliorate
these issues. Regulators across the globe are
taking steps to ensure that a robust flow of
actionable data on material ESG issues is available
to support the development of best practices in
the field and are taking steps to protect investors-
both signs of a maturing discipline.
In this context, academics and investment
professionals are considering how to frame
a theory of finance that accounts for systemic risk,
as suggested by ESG advocates. MPT and
CAPM were instrumental in bringing rigor to
portfolio construction in the 20th
century.
Are they still fit for purpose? Or are we moving
into a post-MPT/CAPM world?
It's too early to declare that ESG investment is
the 21st
century framework for investment.
But we may look back one day in the future and
realize that the paradigm was shifting. K
1 The full report is available at https://files.pitchbook.com/website/files/pdf/2022_Sustainable_Investment_Survey.pdf.
Thomas Kuh, Ph.D,, is head of ESG strategy,
Morningstar Indexes.
40

https://files.pitchbook.com/website/files/pdf/2022_Sustainable_Investment_Survey.pdf https://files.pitchbook.com/website/files/pdf/2022_Sustainable_Investment_Survey.pdf

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