Broad-ranging survey shows ESG investing intensifying

Appetite for ESG strategies is on the rise, as investors increasingly recognise opportunity to generate alpha through ESG, but reporting and measurement remain challenging

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A Natixis ESG cross-survey report that leverages data from four global Natixis surveys of financial professionals, individual investors, institutional investors, and professional fund buyers has found ESG investing is gathering momentum for both performance and personal values.

The main findings revealed that six in ten (59%, same in Asia) financial professionals, 57% (81% in Asia) of professional fund buyers, and 56% (63% in Asia) of institutional investors believe there is alpha to be found in ESG, whilst also believing these strategies can mitigate exposure to governance and social risks not captured in traditional analysis. More than half (56%, 61% in Asia) of individual investors believe that companies that demonstrate a higher level of integrity will outperform those that do not.

The findings also revealed that nearly two thirds (61%) of professional investors in Asia consider investments a way of making positive social or environmental impact, compared to 57% of professional investors globally.

Institutional investors continue to lead the way in the adoption of ESG strategies in their portfolios. Almost two thirds (65%, 72% in Asia) believe ESG will become standard practice in the next five years, up from 60% in 2017. Among those who implement ESG today, 43% (52% in Asia) say they believe this analysis is as important to their investment process as traditional fundamental analysis.

However, the survey also demonstrated the need for more advanced reporting and measurement. More than two thirds of financial professionals (68%, same in Asia) said they would be more likely to recommend ESG products if there was better data and reporting available.

“As an active manager, we view ESG factors as inherently part of long-term, active investment strategies. Investors agree. ESG-related investment strategies are now recognised beyond the narrow scope of negative screening with which it was once associated,” says Jean Raby, CEO of Natixis Investment Managers.

Raby adds, “Demand for ESG-related strategies is outpacing supply. As it continues to expand into a broader set of investment processes, investors will increasingly require greater clarity and definition on ESG strategies, how they are implemented, and what the benefits of ESG factors are on investment performance. There are some clear steps to take, including better taxonomy and labelling standards across the industry, and more transparency around climate and ESG reporting.”

Institutions are integrating a wide range of ESG strategies, most frequently employing ESG integration, which makes analysis of ESG factors part of their fundamental analysis process. ESG investing is also making in-roads in wholesale markets, where 65% of fund buyers say it is part of their investment practices. In this field, slightly fewer professional fund buyers in Asia rely on active ownership (5%, 7.5% globally) and ESG integration (10%, 18% globally), but larger numbers employ both impact investing (24%, 10% globally) and best-in-class approaches (29%, 10% globally).

Fabrice Chemouny, head of APAC at Natixis Investment Managers comments, “As with most new innovations in investing, institutional investors have been leading the charge on ESG. More than half of the institutional investors in Asia (53%) already incorporate ESG in their portfolios and the majority (58%) plan to increase allocations in 2019. As they face greater reporting requirements of their own, they will increasingly come to lean on the investment industry to provide the measurement and reporting they need, which will be to the benefit of investors across the board.”

In contrast to older generations, the majority (56%) of millennial investors and half (48%) of Generation X before them said they believe their investments can have a positive impact on the world. Only 41% of Baby Boomers and 30% of the Silent Generation said the same.

Across the investor groups surveyed, the findings reveal the importance of aligning investments to values, a particularly important consideration for individual investors – four in five (81% and 84% in Asia) said the ability to customize their investments to meet their personal values was important. This is not however at the detriment of returns, with approximately half (50% and 41% in Asia) who say they are not willing to give up investment performance in order to align their assets and values. Almost three in five (59% and 61% in Asia) institutional investors and more than half (52% and 57% in Asia) of professional fund buyers also identified the need to align investment strategies to organizational values as the primary reason for integrating ESG.

For professional investors globally, environmental considerations continue to be the primary ESG consideration. When asked to identify the factors they were most focused on incorporating within their investment strategy, more than three quarters (76% and 75% in Asia) of institutional investors selected environmental, followed by governance (70%, same in Asia) and social (61% and 67% in Asia). This focus is reflected by professional fund buyers for whom environmental factors are the primary consideration for four-fifths (80% and 79% in Asia), followed by governance (73% and 79% in Asia) and social (65% and 36% in Asia).

Summary of findings: 

·         In Asia, 59% of financial professionals, 81% of professional fund buyers, and 63% of institutional investors believe there is alpha to be found in ESG

·         61% of professional investors in Asia likely to consider their investments a way of making positive social or environmental impact

·         58% of institutional investors in Asia intend to increase allocations to ESG over the course of 2019

·         Four fifths (83%) of individual investors in Asia want investments aligned to their personal values

·         Consensus that ESG strategies can mitigate exposure to governance and social risks not captured in traditional analysis

·         Reporting and measurement identified as the biggest challenge to ESG according to two thirds of institutional investors and professional fund buyers

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Date

17 May 2019

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