The third dimension of investing
At Wells Fargo Asset Management, we believe that environmental, social, and governance (ESG) as an investment consideration will evolve into another dimension of investing, as preference takes its place alongside risk and return.
ESG is in its early stages, and many investors remain unsure how to use ESG to align their portfolios with their preferences. We recognize the importance of their questions about the relationships between risk, return, and their preferences, based on their beliefs and values, and we think such questions will be increasingly important in the years to come. For more than 30 years, our 29 independent teams have employed ESG-related insights in our investment solutions and investment approaches.
We are committed to furthering the advancement of ESG through research and the development of relevant investment strategies. Part of that work is ensuring — within our organization and as an industry — that data are more transparent, accurate, and accessible. We are confident that these efforts will support greater understanding of the ways ESG factors and their integration into portfolios may be able to influence individual security performance and portfolio outcomes.
Risk, return, and alignment
Fredrik Axsater, Head of Strategic Business Segments, and ESG expert Chris McKnett share their views about the potential of ESG investing and spotlight global trends.
Risk, Return, and Alignment
Fredrik Axsater, CFA: I see ESG as the next frontier really, of investment science. Back in the old days it was about returns and that evolved into risk and returns. And I think of ESG as a third dimension, of making sure that we look at risk, return and also the broader objectives of clients. What are their preferences? What are their priorities? How can we make sure that you also are greatly aligned with your stakeholders across your organization? How can we take into account a generational shift for advisors with your clients, or even with advisors?
ESG also has tremendous role in also accomplishing your broader objectives.
Christopher McKnett: Moving forward, the three trends that we want our clients to be aware of are first, the financial conviction around the linkage between ESG performance and investment risks and return. Two, the global public policy and regulatory agenda is very conducive and supportive of embedding sustainability and ESG considerations in the capital markets. And three, the data arms race. What I mean by the data arms race is making sense of the explosion of ESG information through advanced analytical techniques to make better, more informed investment decisions.
From an investment perspective, we think about ESG as an additional set of information that our investment teams can harness to make more informed insights. When we look at the composition of the market's value overall, we see more and more of it is comprised of intangible assets. These are things like the strength of its human capital, its environmental efficiency, the quality of its leadership in corporate governance. And ESG really helps illuminate a lot of these non-traditional drivers of investment value. And so we think that a great company and a sustainable company today and tomorrow has to be operationally excellent and financially sound and ESG proficient.
Stock values fluctuate in response to the activities of individual companies and general market and economic conditions. Bond values fluctuate in response to the financial condition of individual issuers, general market and economic conditions, and changes in interest rates. Changes in market conditions and government policies may lead to periods of heightened volatility in the bond market and reduced liquidity for certain bonds held by the fund. In general, when interest rates rise, bond values fall and investors may lose principal value. Interest rate changes and their impact on the fund and its share price can be sudden and unpredictable. Investing in environmental, social, and governance (ESG) carries the risk that, under certain market conditions, the investments may underperform products that invest in a broader array of investments. In addition, some ESG investments may be dependent on government tax incentives and subsidies and on political support for certain environmental technologies and companies. The ESG sector also may have challenges such as a limited number of issuers and liquidity in the market, including a robust secondary market. Investing primarily in responsible investments carries the risk that, under certain market conditions, an investment may underperform funds that do not use a responsible investment strategy.
Our ESG investment philosophy
Our investment teams have aligned around a common philosophy — to further the advancement of ESG as the third dimension of investing. We have built our philosophy, policies, and processes to deliver on client and community expectations in a responsible and sustainable way.
Considerations that extend beyond financial statement analysis have been core parts of our investment analysis across asset classes for more than three decades. The reason: Collecting and analyzing information about ESG helps us develop a more thorough understanding of our investments and their risk and return profiles. As we seek ESG-related insights, we can leverage our long commitment and experience performing bottom-up analysis of issuers, markets, and policy.
We have taken this approach for more than 30 years because we believe that serving as responsible stewards of the assets we manage can potentially result in better investment outcomes.
ESG and corporate social responsibility
Like many of our clients, Wells Fargo has a strong commitment to corporate social responsibility. Learn more here about our work in our communities and around the world.Wells Fargo Corporate Social Responsibility
Defining your ESG approach
Many people and institutions are already self-proclaimed ESG investors. Meanwhile, a growing number are recognizing the importance of ESG factors to risk and return — acknowledging the impact on asset valuations from governance factors such as board membership, social factors such as the use of human capital, environmental factors such as energy efficiency, and myriad other variables related to ESG. Our team of experts can help you identify your own approach to ESG investing. We work with you to:
- Understand your risk preferences, beliefs, constraints, and objectives
- Identify pertinent ESG factors
- Use our analytics to understand the relationships between ESG factors, alpha drivers and risks, and the overall impact on risk-adjusted returns
We subscribe to and incorporate the ESG tenets put forth by Principles for Responsible Investing. Additionally, our ESG teams are well steeped in the connections between corporate social responsibility and investment outcomes. We help you explore and connect the two.
ESG commitments and memberships
We work in close partnership with leading industry associations, disclosure and standard bodies, and non-profit organizations to help lead and drive the approaches to the integration of ESG in financial strategies and processes. Learn more about our industry associations, as well as our policies and process (PDF).
Your team of experts
Our ESG professionals welcome the opportunity to partner with you to explore your objectives and help you pursue your goals.