Responsible investing accelerates as investment merits gain traction
RBC GAM's research reveals that ESG-based investing has established a solid position alongside other fundamental investment approaches
NINETY percent of institutional investors believe environmental, social and governance (ESG) integrated portfolios are likely to perform as well or better than non-ESG integrated portfolios, according to a new global survey by RBC Global Asset Management (RBC GAM).
The results reveal that adoption of responsible investing – including ESG integration, impact investing and engagement by asset owners – is growing steadily as the focus of institutional investors moves from "whether to" to "how to" implement a responsible investment approach.
RBC GAM's research reveals that ESG-based investing has established a solid position alongside other fundamental investment approaches. Moreover, there is a growing interest in applying ESG principles to diverse asset classes, including fixed income and infrastructure. RBC GAM is the asset management division of Royal Bank of Canada.
"This new data confirms that the majority of institutional investors and consultants have either adopted ESG principles or are actively looking at how to do so," says Judy Cotte, vice-president and head of corporate governance and responsible investment at RBC Global Asset Management.
"Importantly, many institutional asset owners now believe they have a duty to consider a responsible investing approach. This ongoing shift has significant implications for how large institutional asset pools are allocated, as well as the advice and service provided by consultants and asset managers," Cotte adds.
Responsible Investing: Charting a Sustainable Advantage is RBC GAM's third annual survey of institutional investors' perceptions and intentions regarding responsible investing. For this year's report, RBC GAM, which includes BlueBay Asset Management, surveyed 542 institutional asset owners and investment consultants in the US, Canada, Europe and Asia. Key findings from the survey include:
Performance has become a key selling point: A full 38% of 2018 survey respondents believe integrating ESG factors can help generate alpha – a significant increase from 2017 results when 24% of respondents said that they consider ESG to be a source of alpha. Only 20% of respondents in 2018 do not believe ESG integration is an alpha source. On the other hand, the level of uncertainty about ESG's merits as an alpha source remains strong: 42% of respondents continue to say they aren't sure.
Responsible investing is increasingly considered to be a fiduciary responsibility: More than 50% of all respondents who incorporate ESG factors into their investment approach say they consider this to be part of their fiduciary duty – double the percentage who said so last year.
Gender diversity on corporate boards continues to be important: Forty-two percent of institutional investors support shareholder proposals as an effective means to achieve gender diversity on boards. This replaced "market forces" as the preferred approach identified in last year's survey. In addition this year, we asked respondents about diversity targets and discovered that 63% favour non-binding diversity targets and, of those, 64% support a target greater than 30%.
ESG goes beyond equities: Equities have been the primary focus when considering ESG factors with the survey confirming that the majority (84%) of institutional investors incorporate ESG factors into their process. However, the survey also indicates that ESG analysis is moving beyond equities, as 60% of respondents incorporate it into their fixed-income portfolios, 43% in real estate, 36% in infrastructure and 34% in alternative assets.
Exclusion screens vs ESG integration and engagement: As responsible investing has developed, the discussion about how to apply the principles in a portfolio has evolved from negative screens (often excluding "sin" stocks such as alcohol, tobacco and firearms companies) to a range of approaches with an increased focus on engagement with companies as a way to influence corporate behaviour. When asked in the context of the Fossil Fuel Free movement whether it was more effective to divest or engage, for example, 45% of the 2018 survey respondents said engagement is more effective (compared to 8% of respondents who prefer divestment), demonstrating that investors continue to favour engaging in dialogue with companies instead of simply selling their shares.
Negative screening: Among institutional investors who apply negative screens to their portfolios, companies associated with cluster munitions and landmines were the most likely to be excluded (75% of respondents screen them out), followed by weapons generally (66%), tobacco (60%) and fossil fuels (42%). With respect to fossil fuel screens, the survey revealed pointed differences by region: fossil fuel screens are unpopular in Canada (23%) while in the U.S. they are among the most widely used screens (62%) – in line with weapons and tobacco, and even slightly ahead of cluster munitions. In the UK, screens are applied more evenly across the board.
The survey results affirm that responsible investing – and the integration of ESG principles in particular – continues to grow. It also reveals that the remaining barriers to adoption may be a question of adequate resources and access to quality information, as opposed to philosophical opposition to the idea. Institutional investors, boards of trustees, consultants and other members of the investment ecosystem increasingly appear to understand the value of ESG integration and are demanding that it be incorporated into the investment process.
"As industry acceptance of ESG integration has accelerated and become mainstream, there will be greater focus on ESG-related investment research and its application in the portfolio management process," says Habib Subjally, senior portfolio manager and head global equities at RBC Global Asset Management (UK).