Two-thirds of institutional investors consider environmental, social and governance factors, according to a survey conducted by RBC Global Asset Management Inc.
The survey, which questioned 434 institutional asset owners and investment consultants in Canada, the United States and Europe, found that of the two-thirds that do consider such factors, 25 per cent intend to boost their allocations to managers with investment strategies based on environmental, social and governance matters within a year.
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While the survey noted the numbers indicate investment approaches focused on environmental, social and governance factors are becoming more popular, perceptions differ greatly by region. Some investors remain skeptical of the benefits of adopting the approach and aren’t impressed with the data available on the performance. Higher percentages of those asked in Europe (85 per cent) and Canada (73 per cent) reported using environmental, social and governance factors than in the United States (49 per cent).
The most popular reason (51 per cent) institutional investors gave for not using an environmental, social and governance analysis was that their corporate boards hadn’t given them a mandate to do so. Canadians were less likely to site that reason than their global counterparts. Another reason given by those who don’t use it was that the value proposition remains unclear (37 per cent).
The persistence of the idea that good returns are less likely when using environmental, social and governance factors is frustrating, said Michael Jantzi, chief executive officer of research firm Sustainanalytics, at an event held by RBC Global Asset Management in Toronto on Tuesday.
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“Japan is the most exciting ESG market in the world right now, bar none,” he said, adding that the country has largely skipped the stage hesitation around performance that remains common in North America and has gone straight to integrating environmental, social and governance aspects without questioning whether they provide value.
The survey also noted investors find it difficult to acquire adequate information on whether companies would meet environmental, social and governance requirements and aren’t happy with the metrics available. There was also a lack of consensus on the role shareholders and regulators should play in pushing for the improvement of corporate reporting and issues of gender diversity among directors. Nevertheless, in all three regions — 71 per cent in the United States, 80 per cent in Canada and 68 per cent in Europe — the majority of investors said gender diversity of directors was important to them.
“Globally, we are seeing a clear trend toward greater awareness, interest and adoption of ESG analysis and responsible investing,” said Judy Cotte, vice-president and head of corporate governance and responsible investment at RBC Global Asset Management. “This survey reveals that many institutional investors are actively discussing these issues within their organizations and with consultants and stakeholders. And while some institutions are moving at a cautious pace, others are moving rapidly to adopt an ESG-based investment approach.”
On moving away from fossil fuels, just six per cent of global respondents said divestment from relevant investments was a more effective strategy than engagement. In Canada, where related industries make up a weighty portion of the economy, institutions preferred engagement with companies at a higher rate (51 per cent) than their counterparts in the United States (41 per cent) and Europe (38 per cent).
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In Europe, environmental, social and governance factors are largely a core part of investment philosophies, Karen Lockridge, principle for responsible investment at Mercer, said at the event on Tuesday. She cited Europeans’ awareness of climate change and noted the advantages of pricing it into the market.
“There are a number of investors who view [climate change] is not priced into the market, so there is an opportunity there to reduce that risk so when the market does start to price it in, an investor is better positioned,” she said.
As for consultants, Canadian respondents were much more likely (28 per cent) to initiate discussions with asset owner clients about environmental, social and governance factors than those in the United States (eight per cent) and Europe (nine per cent).
“In Canada, as in the U.S. and Europe, the most common question investment consultants are asked by clients about ESG is whether an ESG-based approach will negatively impact investment performance,” said Andrew Sweeney, institutional portfolio manager at RBC Global Asset Management Inc.
“This and other data from the survey reveal a high level of interest and curiosity about responsible investing, including areas of significant uncertainty. In today’s market, asset managers have an opportunity to utilize ESG analysis as they compete to add value for investors. While for consultants, opportunity exists for those that are able to offer guidance to their clients around the important and evolving topic of responsible investing.”
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