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Portfolio > Alternative Investments

Do ESG Investments Boost Portfolios?

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Despite the fact that the vast majority of institutional investors are now incorporating environmental, social and governance (ESG) investments in their investment decisions, there’s only a small percentage that see these socially responsible investments as having a positive effect.

A recent Natixis survey of 660 institutional investors worldwide found that 95% of them are incorporating ESG criteria in their investment decision-making and analysis.

However, the survey also finds that only 26% of the investors surveyed agree that incorporating ESG into investment decision-making has had a positive effect on their investment performance.

Natixis Global Asset Management exec Philippe Zaouati – who manages Mirova, the responsible investment subsidiary of Natixis – thinks this number is low, and he disagrees.

“If you look at what happened, for example, with Volkswagen,” Zaouati said during a visit to ThinkAdvisor’s New York office, “this is a clear example.”

Volkswagen’s stock plummeted after the carmaker admitted in September to misleading U.S. regulators about emissions. Since then, Volkswagen’s shares have lost almost a third of their value, or about 22 billion euros ($24 billion), according to Reuters.

“We were clearly not invested in Volkswagen, and the reason we were not invested with Volkswagen was clearly for ESG reasons,” Zaouati said. “And for two reasons: First one was governance. The governance rating of Volkswagen was very bad for understanding reasons. The other one was environmental topic. Just before the crisis, if you had looked clearly and compared Volkswagen to BMW to Toyota, it was crystal clear that some of them were really involved to committing to innovation and climate change. Toyota says, for example, ‘In 2050 probably there will be no commercial fossil fuel vehicle.’”

For these reasons, Zaouati’s fund invested in companies like Toyota and BMW – and “not at all in Volkswagen,” he said.

“This is clearly the kind of value-added you can have,” he said. “It’s not always the case. There are not thousands of examples, but it’s very difficult now to say that the ESG has no effect.”

The survey does find that many institutional investors believe ESG investments have the potential to generate alpha. According to the survey, 50% of institutional managers surveyed believe ESG investments could be a source of alpha. However, 52% also think one of the primary hurdles stopping investors more widespread adoption of ESG investing is “difficulty measuring performance.”

More than half (51%) also agree that ESG investing mitigates risks, “such as loss of assets due to lawsuits, social discord or environmental harm,” according to Natixis.

Risk and alpha aside, the reason that was cited most frequently for incorporating ESG investments is that “their fund’s mandate or investment policy dictates it,” the survey finds. 

Also, interestingly, there’s a large percentage of investors (64%) that believe ESG measures serve primarily as a “public relations tool.”

While Zaouati disagrees with this sentiment, he said he “can understand why the people say that.”

“It’s moving, but a few years ago most of the sustainable development directors reported to the head of communication,” he said. “It was about communication, just writing every year a sustainable development report – a lot of photographs, a lot of good things and that’s it.”

This can leave the impression that companies are only doing ESG reports to have a positive spin on their activities, rather than a real business decision.

“This is changing a lot,” Zaouati said. “Now, most of these sustainability people in the companies are in the ‘planning and strategy’ departments, more and more. And some of them directly report into the CEO, in a lot of big companies.”

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