Climate change, resource scarcity, social responsibility and good citizenship – professional investors are increasingly factoring sustainability into governance policies, portfolio decision-making processes and investment allocations, according to a new study from PwC’s Investor Resource Institute.
Indicative of the increased attention institutional investors are paying to sustainability, Stanford University Board of Trustees made headlines recently, announcing that university endowment funds will not be invested in some 100 publicly traded companies whose principal business is investing in coal. Moreover, they stated that the university will divest its current holdings in the shares of these companies.
Aiming to assess the influence of sustainability issues among large professional investment companies, a broad mix of institutional investors – asset managers, pension funds, mutual funds, hedge funds and others – responsible for managing over $7.6 trillion in assets responded to PwC Resource Institute’s survey. As the institute’s leader, Kayla Gillan, explains in a press release:
“Our research sought to gain insight from investors about how they are incorporating issues of climate change, resource scarcity, extreme weather events and evolving corporate responsibility expectations into their investment decisions and strategies. We found significant evidence that an effect is occurring today—and that it is likely to increase in coming years.”
Factoring sustainability into investment decision-making
Four out of every five institutional investment companies responding to PwC’s survey said they considered a variety of sustainability issues in at least one, if not more, investment contexts in the past year. More than four of five (85 percent) said they anticipate doing so three years hence.
PwC’s study also revealed that institutional investors are not satisfied with the amount or quality of sustainability reporting and the information they are able to obtain from corporate managements. “Investors want to be part of the sustainability dialogue,” PwC points out. “And they want direct engagement with the companies in which they invest.”
As Ms. Gillan notes in the introduction to the report, entitled Sustainability goes mainstream: Insights into investor views:
“[B]ack in 2009 over 560 investment institutions with more than $18 trillion in assets worldwide signed on to the United Nations’ Principles for Responsible Investment (PRI) Initiative.
That number has grown to over 1,200 with some $34 trillion in assets under management in the past five years, as institutional investors increasingly see the importance, and value, of integrating environmental, social and governance issues into their strategic decision-making and portfolio management processes.”
Why are institutional investors increasingly factoring sustainability issues into their investment decision making? PwC’s research reveals a number of reasons. At bottom, they have apparently made a judgment that the problems and challenges associated with sustainability issues – climate change, extreme weather events, resource scarcity, social responsibility and good corporate citizenship – expose the companies they invest in to greater risks and potential loss than conventional economic/financial accounting and reporting lets on.
Conversely, they see benefits, and greater value, in companies that are tackling and coming to grips with sustainability issues and the social and environmental, as well as economic and financial, challenges they pose.
As the PwC chart below shows, reducing risk was the most oft-cited primary driver for institutional investment companies to factor sustainability issues into their decision-making processes.
The following chart shows the organizational context within which institutional investors deem sustainability most relevant:
PwC Resource Institute researchers also found that the percentage of institutional investors factoring sustainability issues into their decision-making processes varies with the dollar-value of assets under management:
The study also revealed that many investors aren’t satisfied with corporate sustainability reporting and disclosure:
That’s not deterring institutional investors, however. They expect sustainability to factor into their decision-making to an even greater degree in future.
*All images credit: PwC Resource Institute, 2015, “Sustainability goes mainstream: Insights into investor views”