Environmental, social, and governance (ESG) investing and sustainability have generated an enormous amount of interest in Europe and increasing interest in the United States and Asia.
Kahn describes this trend as “Investing beyond Returns” and says it’s not strictly about risk and returns, but something else. He connects it to the concept of utility function.
“We may all want portfolios that reflect our own particular utility,” he said, “and it may be harder to put together a one-size-fits-all product.”
Nevertheless, Kahn believes that ESG can be delivered with more certainty by investment managers than active returns.
“There’s a set of ESG investments that are pretty straightforward and satisfy a reasonable number of investor needs,” he said. “No tobacco, oil, military defense — You don’t need a a lot of sophistication to deliver a portfolio that doesn’t have those stocks.”
Where it can get complicated is with ESG scores, which are often company reported and may reflect company policies rather than actual practice.
“This is where ESG and big data overlap,” Kahn said. “We can measure company performance. It may be a bit messy. The investors who are looking for more subtle ESG, without being just exclusionary . . . that might be an opportunity for active management.”
There is also an opportunity for mass customization. ESG criteria can be subjective, depending on the particular investor. They may want to put more emphasis on social justice issues, as opposed to environmental ones, or vice versa.
Whether such methods lead to higher returns is almost immaterial.
“I think this is here to stay,” Kahn said.