Socially responsible investing (SRI) has in recent years become a major consideration in the asset-management industry. Three recent surveys help shed light on the high level of adoption among both institutional and retail investors.
According to a survey from professors at the University of Oxford and Harvard Business School published last quarter,1 82% of 652 consulted asset owners and managers integrate environmental, social and governance (ESG) strategies into their portfolios. The result is very close to another poll from November 2017,2 conducted by BNP Paribas, which showed 79% of 461 institutions polled are ESG adopters.
According to the latest biennial review by the Global Sustainable Investment Alliance, which covered the years 2015 and 2016, SRI represented 26% of all professionally managed assets globally.
ESG cascades across industry
More and more asset owners are now incorporating ESG approaches into their portfolios as the fiduciary role of investing responsibly becomes customary throughout the industry. Asset managers, meanwhile, have the duty and challenge of presenting strategies and products that meet their clients’ criteria.
The surveys signaled a wide acceptance that ESG considerations can affect portfolio returns, an argument that has received much support and academic evidence in the industry in recent years. This coincides with growing recognition that responsible companies can better manage risk and avoid unforeseen value-destroying events.
A total of 63% of participants in the Oxford/Harvard survey said they take ESG criteria into account because the information is material to performance, the most cited reason for ESG adoption and vastly outweighing ethical considerations. In the BNP survey, 72% of respondents said they believe ESG enhances long-term returns.
Hurdles to ESG adoption
The surveys also reveal why many investors still shun ESG.
In the BNP poll, 55% of respondents cited lack of robust data as the main headwind to ESG adoption. However, that problem may abate in two years, as only 15% of respondents said it will be an issue by then. A total of 28% see the ability to meet asset owners’ needs as the biggest problem in two years’ time.
According to the Oxford/Harvard survey, 27% of investors blame the lack of stakeholder demand for not taking ESG information into consideration in investment decisions. Just over 21% responded they don’t do so due to lack of reliable non-financial data.
The survey further showed that the top three biggest impediments to ESG integration all involved the sourcing of data: weak cross-company information comparability, lack of reporting standards and the cost of research.
Those concerns help explain why more asset owners and managers have in recent years employed ESG specialists to gather and analyze company data. They also underline the importance of industry research firms that can provide uniform cross-company data.
The Oxford/Harvard study also showed that the top three uses of ESG information by investors are 1) engagement with companies, 2) full integration into individual stock valuation and 3) negative screening. However, 61% of respondents said they deem full integration into valuations the most positive for investment performance.
Promising growth picture
The BNP survey also painted a bright growth outlook for ESG. A total of 46% of asset owners already including ESG plan to invest at least half of their assets into funds that incorporate ESG by 2019, and 54% of asset managers plan to market at least half of their funds as ESG/RI funds by 2019. Today, 45% of asset owners and 40% of asset managers have 25% or less of their funds either invested in or marketed as ESG/RI funds, the survey showed.
Retail investors also becoming more ESG-aware
A third survey,3 by Schroders, last year suggested the step-up in SRI is not limited to the institutional space, with more retail investors taking a responsible attitude to investments. The UK-based asset manager polled more than 22,000 individual investors from 30 countries, with some of the following findings:
- More than three quarters say sustainable investments have become more important to them in the past five years, with the ratio reaching 83% in the cohort aged 18 to 44.
- Two thirds of respondents said they have actually boosted investments along sustainability lines in the period.
- Globally, people with sustainable investments allocate an average of 39% of their portfolio to those strategies.
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1Amel-Zadeh, A. and Serafeim, G. ‘Why and How Investors Use ESG Information: Evidence from a Global Survey,’ Financial Analysts Journal, Volume 74, Issue 3, Third Quarter 2018.
2 BNP Paribas Securities Services, ‘Great Expectations: ESG,’ Sep. 7, 2017.
3 Schroders, ‘Global Investor Study – Is information the key to increasing sustainable investments?” Sep. 28, 2017.