ESG investing is growing, but lack of standards is hampering investor adoption rate

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More than half (56%) of investors globally, including 61% in the US, believe companies that demonstrate higher integrity will outperform, according to a new report on Environmental, Social and Governance (ESG) investment issues released by Natixis Investment Managers. 

 

“Today’s investors expect the best of both worlds – investments that generate positive performance and also support the values and causes that matter to them – and those two worlds are increasingly merging,” said Harald Walkate, Head of Corporate Social Responsibility and ESG for Natixis Investment Managers. “Driven by a genuine convergence of goals, the future of ESG investing is gaining positive attention and popularity across intermediaries. The task now is to further refine the investment processes, develop well-defined metrics and continue to improve transparency.”

The report Looking for the Best of Both Worlds  is based on surveys Natixis conducted globally with 12,375 financial professionals, individual investors, and institutional investors about the views and issues that drive their decisions on ESG investing. Natixis found that the potential to support personal values while meeting portfolio objectives may be a critical reason why demand for ESG strategies is strong among investors. 

 

Key findings 

According to the survey:

  • Six in ten (60%) investors globally say they already actively invest with the purpose of making a positive social or environmental impact. A substantially larger number – 76%, including 71% in the US – say it is important to them to be able to invest according to their personal values.
  • More than half (56%) of investors globally say they actively avoid investing in companies that go against their personal values. However, doubts about whether they have enough information about ESG mean that fewer than half (47%) of investors globally believe their investments can have a positive impact on the world.
  • Half (56%) of institutional investors believe there is alpha1 to be found in ESG, but lack of track records and difficulty measuring performance are cited as main challenges.

 

Investors know what ESG factors matter to them, but lack tools to measure them

When assessing the environment (E), social (S) and governance aspects of “ESG,” investors have definite views on what concerns them most. The three main issues for investors globally are pollution (the “E”) cited by 52%, human rights (the “S”) cited by 54%, and bribery and corruption (the “G”) cited by 60%. US investors differ only slightly in their priorities: Human rights (59%) is the most-often cited issue, followed by corruption (57%) and pollution (52%).

Climate change, often touted as a top concern for investors, trails as a priority at 45% globally and 41% in the US. However, nearly three in four investors, 73% globally and 71% in the US, say they would purchase a fund if it demonstrated a better carbon footprint, a key goal for climate change.

In terms of monitoring the ESG exposures within their portfolios, investors globally say they would take specific actions to align their investments with their values. For example, 44% of investors globally say they would sell stocks in their portfolio involved with weapons manufacturing, tobacco and gambling. One-third (35%) would sell their shares of companies that emit a higher level of pollution than their peers. Finally, 25% would sell shares of companies that lack diversity and/or gender equality in top management positions.

However, only 47% of investors globally, say they have the information they need to make socially responsible investment decisions.

 

Financial advisors may be missing an opportunity

Despite the large number of investors who think it is important to align their investments with their values, only 25% of advisors globally, and 28% in the US, believe clients have asked more for ESG investments in the last 12 months. Advisors may be slow to recognize an important investment trend: With investor interest increasing, just 15% of advisors globally, and 17% in the US, think they need to improve their ability to understand and explain ESG to their clients.

While they may feel comfortable with their understanding of ESG, many advisors in the US actually have a limited view of what ESG investing means. When asked to define ESG, a third (33%) say it means negative screening, 20% describe it as incorporating companies’ ESG decision-making into the investment process, 19% impact investing and 19% thematic investing. In order to properly advise their clients, financial intermediaries themselves need a better, clearer understanding of ESG. That said, 62% of US advisors currently say they are more likely to recommend ESG products to their clients if there is better data and reporting on these investments.

 

Institutional investors are positive about ESG, but see challenges to adoption

While institutional investors say that aligning organizational values with investments is the most common reason they incorporate ESG factors into their decision-making, values are not the only driver.

One in five (20%) institutional investors say that they use ESG investing to generate higher risk-adjusted returns over the long term. Nearly as many (18%) say they already have enjoyed enhanced returns as a result of incorporating ESG into their investing, and 40% are satisfied with their ESG strategy’s investment performance. Almost a quarter (23%) already have benefited from increased diversification as a result of ESG. Even more importantly: More than half (56%) believe ESG can mitigate risk going forward, such as loss of assets due to lawsuits, social discord or environmental harm.

The best indicators of ESG’s growing acceptance among institutional investors: More than half (55%) expect to increase their ESG allocation this year, and 65% think ESG will become an industry standard within the next five years.

Although more than half of institutional investors believe there is alpha to be found in ESG, 43% said the lack of well-established track records and difficulty measuring performance are challenges they face. These investors also express concerns about false or exaggerated commitment to ESG-friendly policies – so-called “greenwashing” (40%) and the lack of transparency (37%) in the investing process. 

“Investors have made clear their interest in ESG strategies: Now, the industry has to prove it can deliver across the board – on both values and performance,” said Dave Goodsell, Executive Director of Natixis Investment Managers’ Center for Investor Insight. “Institutional investors, financial advisors and asset managers will need to work together in a concentrated effort to ensure greater acceptance of ESG investing.”

 

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