RBC GAM’s survey reveals sharp differences among institutional investors as to whether ESG analysis can mitigate risk and drive alpha in a portfolio. Some institutions plan to increase their exposure to ESG strategies in the near term while others are holding back, unconvinced of its value and unimpressed with available data about corporate performance on ESG. The survey also uncovered broad disagreement over the proper role of shareholders, industry groups and regulators when it comes to improving corporate reporting and driving change on issues such as gender diversity among directors.
“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.”
Responsible Investing: The Evolution of Ownership is the second annual survey of institutional attitudes and perceptions of responsible investing conducted by RBC GAM. This year, RBC GAM queried 434 institutional asset owners and investment consultants in the United States, Europe and Canada. The key findings from the global survey include:
- ESG is a global phenomenon – A full 67% of global respondents use ESG principles as part of their investment approach. By region, more investors in Europe (85%) than in Canada (73%) and the U.S. (49%) incorporate ESG analysis.
- Mandates (or lack of them) are key – The main reason (51%) given by institutional investors who do not incorporate ESG analysis is the lack of requirements to do so from their boards of directors. The other most commonly cited reasons are an unclear value proposition, and their strict preference for financial analysis. Interestingly, the inverse of these reasons was given by those who have adopted ESG – they do it for the clear value proposition, their preference for multiple analytical factors in the investment process, and to comply with a clear board-level mandate or investment guidelines.
- ESG analysis as an investment tool – Thirty-two percent of global respondents said they do not consider the use of ESG factors to be a way to mitigate risk in their portfolios, while 20% are unsure. Forty-six percent do not consider ESG factors to be an alpha source and 30% are unsure. This uncertainty opens up an opportunity for investment managers who utilize ESG analysis as they compete to create value for their clients.
- Poor information quality – For institutional investors who employ ESG criteria, a majority across all regions of the survey are not satisfied with the disclosure of ESG metrics provided by corporations. U.S. and Canadian investors prefer to allow shareholder proposals to do the work of improving disclosure. European investors prefer that government regulators require it.
- Gender diversity – A large majority of institutional investors in every region polled said gender diversity on corporate boards is important to them – 71% in the U.S., 80% in Canada and 68% in Europe. As with disclosure of ESG metrics, European investors prefer that government regulators require gender diversity; investors in the U.S. strongly prefer market forces to regulation; Canadian investors’ preference is split between shareholder initiatives and market forces.
- Changing Corporate Behavior – Within the context of the Fossil Fuel Free movement, only 6% of global respondents said that divestment was more effective than engagement. In the U.S. and Canada, engagement is viewed as more effective than divestment. One-third of Europeans agree, but the same number view divestment and engagement to be equally effective. On the topic of exclusions more broadly, 48% of European respondents view negative screens as applicable across investor types; less than a third of U.S. and Canadian respondents agreed.
“ESG investing has gone from being a tangential topic for investors, to an increasingly important consideration in the investment decision making process,” said Habib Subjally, Senior Portfolio Manager and Head of Global Equities, RBC Global Asset Management UK Ltd. “There is a growing level of interest among investors to gain a better understanding on the implications of ESG integration. We believe that ESG should not be perceived as the latest investment trend and that when applied in a thoughtful way, considering these factors will enable investors to approach decisions with a broader, more complete set of information.”
More U.S. Investors Remain Unconvinced
Adoption of ESG investing is increasing in the U.S., and fully 25% of survey respondents plan to increase their allocation to ESG investment strategies within the next year. However, U.S. adoption is far behind Europe, where that figure is 49%.
Even where U.S. institutions are adopting ESG strategies, they appear to be doing so more cautiously than their European counterparts.
When asked to what extent ESG principles are used as part of their investment approach, only 12% of U.S. respondents said “significantly used” versus 45% in Europe, while 37% in the U.S. said “somewhat used.” What do significantly and somewhat mean? In the U.S., 50% of respondents who use ESG factor it in less than 20% of their portfolios; 43% of Europeans factor it in more than 80% of their portfolios.
Other data points suggest why this gap exists. Across nearly every question posed by the survey, asset owners in the U.S. appear more skeptical of the value of ESG than their counterparts in other regions:
- Twenty-eight percent of U.S. respondents think ESG mitigates risk. Fifty percent do not and 23% are not sure. Seventy-seven percent of Europeans and 68% of Canadians see ESG as mitigating risk.
- Seventeen percent of U.S. respondents think ESG is a source of alpha. Fifty-nine percent do not and 23% are not sure. Fifty-one percent of Europeans see it this way as do 21% of Canadians.
- Only 5% of U.S. respondents expect ESG investments to perform better than non-ESG investments; 26% percent expect them to perform worse; 69% expect them to have no influence, performing “as well.” To compare, 40% of Europeans and 24% of Canadians expect ESG investments to perform better than non-ESG investments.
- Lastly, while 56% of U.S. respondents said they expect companies with high-quality ESG practices to have more sustainable long-term returns, fewer than 10% expect ESG practices to result in a lower cost of capital, earnings growth and/or higher returns to shareholders.
About the Survey
The data for RBC GAM’s report, Responsible Investing: The Evolution of Ownership, was gathered via a survey conducted in July and August 2017. The survey collected the opinions of 434 institutional asset owners and investment consultants in Canada, the U.S. and Europe. For a full copy of the survey results and analysis visit RBC GAM’s Corporate Governance and Responsible Investing website.
About RBC Global Asset Management
RBC Global Asset Management (RBC GAM) is the asset management division of Royal Bank of Canada (RBC) and includes institutional money managers BlueBay Asset Management and Phillips, Hager & North Investment Management. RBC GAM is a provider of global investment management services and solutions to institutional, high-net-worth and individual investors through separate accounts, pooled funds, mutual funds, hedge funds, exchange-traded funds and specialty investment strategies. The RBC GAM group of companies manages approximately $400 billion in assets and has approximately 1,400 employees located across Canada, the United States, Europe and Asia.
SOURCE RBC Global Asset Management Inc.
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