Global institutional investors increasingly shifting to ESG approach: survey
Globally, institutional investors are shifting more of their assets to an environmental, social and governance-based approach, with year-over-year increases in Canada, the U.S. and the U.K., according to a new survey by RBC Global Asset Management.
Regionally, the percentage of survey respondents that reported using ESG principles “significantly” as opposed to “somewhat” rose slightly in the U.S. (up about three per cent from 2018), more significantly in Canada (up more than five per cent) and rapidly in the U.K. (up 30 per cent).
The survey also found the top reason institutional investors are incorporating this approach is mitigating risk and enhancing returns, cited by 53 per cent of respondents.
Read: Institutional investors increasingly see ESG as source of alpha: survey
The responsible investing market is showing signs of maturing, suggested the survey. The percentage of institutional investors that said they use ESG principles as part of their investment approach and decision-making process remained relatively flat, at 70 per cent, compared to last year. However, on a regional basis, the percentage of institutional investors in the U.K. and Canada that “significantly” or “somewhat” adopt ESG factors continued to tick upward, reaching 97 per cent and 80 per cent, respectively. In the U.S., ESG adoption was flat compared to 2018, at around 65 per cent.
“This new data confirms that while the multi-year trend of rapid increases in ESG adoption by institutional investors may be tapering off, the vast majority of these asset owners are still committed to using ESG principles in their investment process,” said Melanie Adams, vice-president and head of corporate governance and responsible investment at RBC Global Asset Management, in a press release.
“It is also noteworthy that institutional investors in the U.S., Canada and the U.K., who already significantly incorporate ESG into their investment decision-making are more convinced than ever that this approach helps lower risk and increase returns, and these investors are committing a larger percentage of their portfolios to an ESG-based approach.”
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While the survey showed confidence among institutional investors adopting an ESG approach, some expressed doubts in this area. For example, the percentage of respondents that said they believe an ESG-based portfolio will perform worse than a non ESG-based portfolio increased from 10 per cent in 2018 to 18 per cent this year. And when asked about ESG’s ability to mitigate risk, the percentage of respondents that said they weren’t sure rose to 24 per cent in 2019, compared to 18 per cent last year.
However, survey respondents that identified as “significant” adopters of ESG held fast in their conviction in this area in 2019, with 98 per cent saying an ESG-integrated portfolio would perform as well or better than a non-ESG-integrated portfolio.
The survey also asked institutional investors what percentage of their portfolio under the umbrella of responsible investing is actively managed. Despite the rise of passive management as a global trend, the overall average level of institutional ESG-based portfolios that’s actively managed is 61 per cent. Among survey respondents, 28 per cent said their entire ESG-based portfolio is actively managed, while 10 per cent said their entire ESG-based portfolio is passively managed.
Read: Navigating the trend towards passive investing
In terms of influencing company behaviour, 39 per cent of survey respondents said corporate engagement is more effective than divestment, down from 45 per cent last year. And the percentage that said divestment is more effective increased slightly, from eight per cent in 2018 to 10 per cent in 2019.
In the 2018 survey, three-quarters of respondents said gender diversity on corporate boards was important to them. This year, the question was phrased in terms of whether companies should adopt gender diversity targets, with 52 per cent of institutional investors saying no.
“While institutional investors who already significantly incorporate ESG principles appear more convinced than ever before that this approach adds value, there still remains a lot of uncertainty around ESG in the broader marketplace,” said Habib Subjally, senior portfolio manager and head of global equities at RBC Global Asset Management (UK) Ltd. “With this increased uncertainty, asset managers, financial advisors and consultants will be called upon to offer guidance to their clients about responsible investing options that support their long-term financial goals.”
Read: How institutional investors are turning the gender diversity dial on corporate boards