There’s a lot of buzz surrounding environmental, social and governance (ESG) investing, but what exactly is it and what is it trying to accomplish? The results from a new survey of institutional investors and fund selectors suggest the answer isn’t always clear.
One thing that does seem clear, according to the survey findings by Natixis Investment Managers, is that more financial institutions are deploying a broader range of ESG strategies to meet rising demand for more sustainable investments. Approximately three-quarters of professional investors—including 72% of institutional investors and 77% of the gatekeepers who select funds for their firm’s investment advisory platform—are now implementing ESG strategies, up from 61% and 65%, respectively, in 2018.
In addition, 68% of professional fund selectors plan to further expand their firm’s ESG offerings this year, the survey found. Their primary reason for doing so is because of investor demand, which fund selectors believe stems from investors’ heightened social awareness (75%). Other factors they say are driving demand include investors’ desire to be part of a greener economy (42%) and concerns about climate change (36%).
Financial Performance
Natixis found that 77% of professional fund selectors and 75% of institutional investors now consider ESG factors an integral part of sound investing. Additionally, the findings suggest that five years from now, nearly 6 in 10 (59%) financial advisors expect ESG investing to be standard practice across the industry.
And while a lack of consensus on ESG measurement has been a challenge for investors, a majority of fund selectors (83%) and institutional investors (79%) say it has gotten easier to benchmark performance. As better ESG data has become available and reporting is standardized, Natixis foresees a stronger narrative emerging on the financial merits of ESG investing.
- More than half of professional investors surveyed—including 53% of institutional investors and 55% of fund selectors—now agree that companies with better ESG track records generate better investment returns.
- 70% of fund selectors and 62% of institutional investors think alpha can be found by incorporating ESG factors into investment analysis. Similarly, more than 6 in 10 (63%) advisors agree that ESG strategies may offer potential to outperform the markets.
When it comes to evaluating a company or industry, nearly half (48%) of professional fund selectors consider nonfinancial ESG factors to be as important as fundamental financial factors. Yet, 67% of fund selectors and 74% of institutional investors say it is still hard to know which nonfinancial measures are material to investment analysis.
Motives and Methods
Institutional investors’ top motivation for implementing ESG is to ensure assets better represent organizational values, which Natixis notes has been their top motivation since 2017. Aligning assets and values also is a top motivation for fund selectors, second only to client demand.
In addition, 77% of individual investors previously surveyed by Natixis say it’s important that their investments and values are aligned. But what they mean by that is important for financial firms to understand.
“For advisors, it’s not always clear what clients mean by personal values or whether ESG investors are primarily motivated by a desire to make a better world or better financial returns, or both,” says Dave Goodsell, Executive Director, Natixis Center for Investor Insight. “Ultimately, more concrete evidence of financial and nonfinancial results is needed, but questions and conversations about clients’ motives could go a long way toward helping advisors tailor the best ESG strategies to meet their clients’ objectives.”
Not surprisingly, Natixis’s research found no single consensus approach to ESG investing. Firms are employing multiple approaches, with distinct risk-return features. Among the approaches professional investors are taking include:
- Integration: The most widely used approach, taken by 54% of fund selectors and 48% of institutional investors, is to integrate ESG factor analysis into the overall investment process, accounting for issues that with potential to materially affect company performance.
- Negative screening: Four in 10 fund selectors (42%) and institutional investors (40%) rely on negative screening, consisting of the exclusion of companies or industries deemed as unethical or harmful. The findings show that the number of fund selectors employing negative screening declined by 15% from 2019 to 2020.
- Active ownership: More than one-third of professional investors—including 35% of fund selectors and 34% of institutional investors—are addressing ESG issues by exercising their ownership rights and voice to effect change, an increase by 45% and 51%, respectively, in 2020 from 2019. Further, 35% of institutional investors say one of the primary reasons they implement ESG strategies is to influence corporate behavior.
- Impact investing: 42% of fund selectors, but just 34% of institutional investors, are engaged in impact investing, with an intent to generate and measure social and environmental benefits alongside financial returns.
- Thematic investing: 43% of fund selectors and 28% of institutional investors focus on thematic investing, which seeks opportunities in emerging trends such as those driven by demographic shifts, innovation and social or policy priorities.
The survey was comprised of 3,600 professional investors globally, including 500 institutional investors, 400 fund selectors and 2,700 financial professionals. Data was gathered in 2020 by research firm CoreData, with supporting data points from prior-year surveys.
