Environmental, social and governance focused investing has become a major factor for institutional investors. On a global basis, 72% of institutional investors are somewhat or to a significant degree using ESG principles as part of their investment approach and decision making, versus 66% last year, according to a recent study by RBC Global Asset Management. The share of global investors not exploring ESG at all has fallen to 28%, down from 33% the previous year.

That said, some places have adopted it faster than others. For example, in the United States, a laggard in this area, 51% of large managers are exploring ESG investing, up from 34% last year. However, Continental Europe has been a longtime proponent of ESG, with 47% of respondents say they use ESG factors in their investment process. In the UK, that is 29.5%, followed by Canada at 20.5% and the U.S. at 18%.

Further good news for ESG fans is that 77% of consultants surveyed, those who aid institutional investors in selecting managers, stated that they employ external managers who incorporate ESG factors into the investment process.

The RBC GAM survey, “Responsible Investing: Charting a Sustainable Advantage,” was conducted between June and July 2018.  Of the 542 respondents, nearly 300 represent organizations that have more than $1 billion in assets. The makeup of the respondents included 14.6% pension plan sponsors, 11.8% consultants, 11.3% foundations or nonprofits, 7.9% government organizations, 7.6% wealth managers and 3.3% RIAs.

“While adoption of ESG investing principles has been increasing steadily in recent years, this trend has the potential to accelerate further as longstanding barriers to more widespread adoptions, such as concerns that incorporating ESG principles could hurt returns or conflict with fiduciary duties, fall away,” the survey authors concluded.

Other findings were that 24% of U.S. respondents now say that an ESG-integrated portfolio will outperform a non-ESG portfolio, almost five times the number who agreed with that statement in 2017.

However, 90% of all respondents believe ESG-integrated portfolios will outperform non-ESG-integrated portfolios. In fact, 40% felt they would do better than non-ESG, while 58% felt that would do as well. Only 10.4% thought they would do worse.

Further, 54% of those surveyed believed ESG integration to be part of their fiduciary duty, which is double last year’s percentage. Indeed, a third of those surveyed cited board and stakeholder requirements as the reason.

Is It Alpha?

Those surveyed still remain skeptical if ESG is a source of alpha. However, 38% believe ESG can generate alpha, which is double last year’s response. Still, 42% say they still aren’t sure.

However, 67% of respondents viewed ESG as a mitigator of risk in a portfolio versus 48% who held that view the previous year. U.S. respondents had a large jump in this belief, 54% in 2018, vs. 28% in 2017.

Although ESG has been incorporated largely into equity portfolios — 84% of respondents who use ESG do so in equities — other areas are growing: 60% are using ESG in fixed income portfolios, 43% with real estate, and 34% with alternative assets. Roughly half of those surveyed said it should be integrated into both equity and fixed income portfolios.

However, a problem is the lack of product on the market for fixed income, the survey found.

In addition, the study found that 76% of respondents didn’t require ESG/SRI screening to portfolios, believing engagement with the board and management was more effective than selling shares. However, those areas most divested were cluster munitions and landmines (75% overall, 96% in Europe), weapons in general (66%), tobacco (60%) and fossil fuel (42%).

Gender Diversity

Bringing diversity to corporate boards was important to 75% of those surveyed. The U.S. saw a year-over-year spike to 84% that agreed, vs. 71% in last year’s survey. To push this, shareholder action was the key tool and actually replaced market forces. Most of those surveyed believed a 31% to 40% diversity target was acceptable. However, 37% of respondents said board diversity targets should not be adopted.

As ESG investing matures, a growing frustration from investors includes “little satisfaction with the quantity and quality of information from companies on issues such as sustainability and governance,” the report stated. “And if anything is holding back greater adoption of ESG-integrated investing by institutional investors, it’s a lack of resources needed to do the work necessary to make it happen.”

The survey asked respondents to rate the quantity of data available on a scale of zero to five, with five being very satisfied. A plurality (40%) landed in the middle, indicating some satisfaction. Experts on an RBC webinar all agreed multiple sources of data should be used, with one noting that “data is a starting point, not an ending point.”

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