ESG: Evolution of sustainable investing and modern practice

Despite the absence of a single definition of sustainable investing, investors are being asked to pay heed to risk, return and investment impact

Key points

  • Sustainable investing can be difficult to define
  • Ensuring short-term decisions do not erode long-term objectives remains crucial
  • The WTW Thinking Ahead Institute has isolated a 1.5% annual long-term investment premium

It is official – sustainable investing is trendy. According to the latest review of the Global Sustainable Investment Alliance (GSIA), there are $22.9trn (€19.2trn) of assets professionally managed under responsible investment strategies, an increase of 25% since the 2014 review. Sustainable investments now represent about 26% of assets managed globally and sustainable investing grew in both absolute and relative terms in nearly every market represented in the report.

Yet despite the meteoric rise in the amount of capital allocated to this area, many investors find sustainable investing difficult to define. This is unsurprising given the large number of closely related terms in this space, which are used interchangeably, and the mottled history of sustainable investment practice over several decades.

A Deutsche Bank study from 2012* charts the evolution of sustainable investing from the 1500s to the present day by grouping it into four broad categories:

Ethical investing (values-driven) – 1500s onwards: Motivated by religious inclinations, this era was defined by negative screening, or deliberately choosing not to invest in companies or industries that did not align with investor values;

Early socially responsible investing (values-driven) – 1960s to mid-1990s: Socially responsible investing (SRI) became a newly coined ‘catch-all’ term for ethically oriented investing and referred to a value-based exclusionary investment approach (therefore somewhat indistinguishable from the previously used ‘ethical investing’);

Current socially responsible investing (values-driven; risk and return) – late-1990s to present: This period represented a shift away from ethics-based investing towards incorporating ESG factors into investment decision-making – therefore linking it to investment returns. Early and modern practices are differentiated by the growth in shareholder activism and the introduction of positive-screening investing;

ESG/responsible investing (risk and return; best in class) – 2003 to present: This emerged from a renewed interest to include corporate governance into SRI (in addition to financial, social and environmental factors). Investors’ desire for improved risk/return outcomes drove focus to this type of investing. Bolstered by the UN-backed Principles for Responsible Investing (PRI), responsible investors became a universally defined concept representing those investors who incorporate ESG factors into their investment process.

In their 2009 lecture at the Carbon Finance Speaker Series, Krosinsky and Robins aptly summarised the evolution of sustainable investing as moving from being “driven by the values of the investor (from the inside out)” to “addressing changing external realities (from the outside in)”.

So what is sustainable investing? Given the evolution and multifaceted nature of sustainable investing, it would be foolhardy to assume that there can be a universally agreed definition. At the Willis Towers Watson Thinking Ahead Institute, we broadly define sustainability as “being mindful of the long-term implications of short-term actions so as to not compromise needs/objectives”. A sustainability mindset is always aware of the rate of extraction of resources from a system (current and projected) relative to the rate at which they are replenished.

For investment, sustainability:

• Involves understanding the material factors that affect long-term value creation;
• Aims to generate long-term, enduring value in an efficient and balanced way which is fair to successive generations;
• And emphasises adaptability, governance and stewardship as coping mechanisms.

The primary goal of sustainable investing can be seen as balancing the maximisation of risk-adjusted financial return with the pursuit of extra-financial motivations and positive impact.

Sustainable investing today? 

Based on the GSIA 2016 review, the largest sustainable investment strategy globally is negative/exclusionary screening ($15.02trn) followed by ESG integration ($10.37trn) and corporate engagement/shareholder action ($8.37trn). The GSIA also reported that the fastest growing strategy, albeit currently the smallest, was impact/community investing.

At the Responsible Investor Europe 2017 conference, the world’s largest pension fund called on asset managers to improve their corporate governance. The Government Pension Investment Fund (GPIF) of Japan, currently managing $1.3trn, emphasised the importance of asset managers publicly disclosing their stewardship activities, integrating ESG into the investment process and exercising voting rights.

marisa hall

There is also a growing trend among asset owners to integrate ESG considerations into passive investments. Examples of this are GPIF’s decision to switch 3% of its Japanese equity portfolio (¥1trn, €7.6bn) to ESG indices, and Swiss Re ’s announcement that it will move its entire $130bn investment portfolio to ESG indices.

Sustainable investing requires an evaluation of a fund’s values and investment beliefs. Values distinguish the investment mission and goals of a fund; beliefs distinguish the investment strategy.

A fund’s mission can cover the spectrum from ‘traditional’ (where the focus is solely on financial aspects) to widening/longer term views of responsibilities (including ownership and consideration of externalities), to joint missions combining financial and defined extra-financial considerations (dual-goal mission). The investment strategies pursued by organisations follow the intersection of mission and the organisation’s belief of the level of materiality and mispricing reflected in sustainability factors.

Based on 2017 research by Future Fund and Willis Towers Watson of 15 leading asset owners, 10 owners could be seen to have: 

• Missions/motivations linked to financial considerations with varying degrees of pro-social collateral benefits; and
• Beliefs that sustainability factors are material – albeit not mispriced.

Two of the 15 had the same motivations but also beliefs around materiality and mispricing of sustainability factors. The remainder followed ‘traditional’ financial motivations with beliefs around the materiality of sustainability factors. While sustainability is seen as an important emerging subject, the asset owners recognised that there were missed opportunities in the overlapping areas of sustainability, ESG, stewardship and long-horizon investing. 

This chimes with the findings of our May 2017 paper, The Search for a Long-Term Premium, which concludes there is an annual net premium of up to 1.5% available to long-horizon investors that can be exploited by investors based on return opportunities and the potential to reduce the drag on returns.

In 1997 John Elkington coined the term ‘triple bottom line’ to argue that corporations should not only focus on the economic value that they add, but also on the environmental and social value they add (and destroy). 

Linked to the significant growth in sustainable investing, investors are increasingly being asked to consider three dimensions to investment: risk, return and impact. Understanding these factors is an important responsibility of sustainable investors and needs to be adequately addressed. Improving the disclosure, measurement and impact of sustainability initiatives is much needed to provide further fuel to its exponential growth.

The concept of dual-goal mission is particularly relevant to universal owners who, as a consequence of their size, own a slice of the whole economy and market through their portfolios. Here, the performance of such funds is more heavily dependent on the long-term progress of the economy than on individual companies.

*Sustainable Investing: Establishing Long-Term Value and Performance,

Marisa Hall is senior investment consultant in the Thinking Ahead Group, an independent research team at Willis Towers Watson, and executive to the Thinking Ahead Institute. Research used in this article can be downloaded at

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