Where the ESG Flowers Should Bloom
David Hunt joins Funds Europe for a discussion on the rise of ESG investing.
NEWARK, N.J., Feb. 11, 2020 – A new PGIM survey of over 300 public and private companies in the U.S., Germany and China highlights the sharply different priorities each is employing in response to new “weightless” business models and the “profit with purpose” era. PGIM Inc. is the $1.3 trillion global investment management business of Prudential Financial, Inc. (NYSE: PRU).
“Our survey looks ahead to the trends and challenges facing corporates globally and how they are responding,” said Taimur Hyat, PGIM’s chief operating officer. “With 50% of institutional portfolios comprised of corporates, we think investors must avoid looking in the rearview mirror and instead focus attention on this new era marked by rapid technological and social change and consider who’s best poised to succeed.”
The quantitative survey of C-suite executives found that:
German firms are lagging their Chinese and U.S. peers in shedding physical assets and embracing the trend towards intangible assets.
In China and the U.S., 77% and 58% of firms, respectively, indicated intangible assets like data, software and brands have become more important than physical assets over the last three years. By comparison, only 50% of German firms said the same. Furthermore, 74% and 58% of firms in China and the U.S. say they will use profits to invest in intangible assets, compared to just 35% for German firms.
Investors looking to capture soaring margins and efficiencies from intangible-heavy firms need to look beyond small startups.
Globally, 64% of large firms plan to increase their investment in intangible assets, compared to 44% of small firms. In a winner-takes-all marketplace where fewer firms dominate, larger firms are the ones leveraging intangible assets the most.
The shift to intangible assets has allowed firms to have a higher variable cost base, enabling them to be more agile in a market downturn.
Forty-five percent of firms across the U.S., Germany and China have increased their variable costs as a share of total costs over the past three years, and more than half believe their share of variable costs will continue to increase over the next three years.
The “weightless” phenomenon is not limited to Silicon Valley firms. Over the last three years, manufacturing companies shifted to a variable cost base more aggressively than service firms.
Fifty-two percent of manufacturing firms globally have increased their variable costs as a share of total costs over the past three years—compared to just 40% of services firms.
Companies are adopting a “profit with purpose” mindset, making the integration of relevant ESG metrics into the investment process an imperative for investors.
Companies are more proactively becoming agents of social change. Germany is leading the way, with 55% of firms considering a range of stakeholders beyond equity holders and short-term profit maximization compared to just 38% and 30% of firms in China and the U.S., respectively.
“Our survey shows that more and more companies are focusing on a “profit with purpose mindset” and a more diverse set of stakeholders,” said Shehriyar Antia, head of thematic research. “Some investors, however, haven’t kept up with the times and need to radically rethink what these new ESG goals mean for successful investing.”
For more information, visit the microsite for “The Future Means Business: The investment implications of transformative new corporate models,” the latest in PGIM’s Megatrends series.
For media interviews with PGIM subject matter experts, please contact Julia O’Brien.
About PGIM and Prudential Financial, Inc.
PGIM, the global asset management business of Prudential Financial, Inc. (NYSE: PRU), ranks among the top 10 largest asset managers in the world* with more than $1.3 trillion in assets under management as of Dec. 31, 2019. With offices in 16 countries, PGIM’s businesses offer a range of investment solutions for retail and institutional investors around the world across a broad range of asset classes, including public fixed income, private fixed income, fundamental equity, quantitative equity, real estate and alternatives. For more information about PGIM, visit pgim.com.
Prudential’s additional businesses offer a variety of products and services, including life insurance, annuities and retirement-related services. For more information about Prudential, please visit news.prudential.com.
Prudential Financial, Inc. of the United States is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom.
*Pensions & Investments’ Top Money Managers list, May 27, 2019; based on Prudential Financial total worldwide institutional assets under management as of Dec. 31, 2018. Assets under management (AUM) are based on company estimates and are subject to change.