Investors in the U.S. in general have been slower than their counterparts in Europe in taking environmental, social and governance (ESG) principles into account, but that resistance seems to be falling away.
According to the just-released third annual Responsible Investing Survey by RBC Global Asset Management, the percentage of U.S. institutional investors who reject ESG outright shrank to 34 percent from 51 percent in 2017. Further, 24 percent of U.S. investors now say that an ESG integrated portfolio will outperform a non-ESG portfolio, five times the number who agreed in 2017.
This echoes a global trend. For the first time, and by nearly every measure, institutional investors and consultants have shifted decisively from asking whether to adopt ESG principles, to looking at how to implement them.
ESG becomes mainstreamGlobally, 90 percent of institutional investors believe ESG integrated portfolios are likely to perform as well or better than non-ESG integrated portfolios, and 72 percent are using ESG to make investment decisions. More than half say they consider ESG integration to be part of their fiduciary duty – double the percentage who said so last year.
The remaining barriers to more widespread adoption of ESG are now logistical, versus philosophical, the survey found. Converting the remaining skeptics is more a question of adequate resources and access to quality information than philosophical opposition to the idea.
RBC GAM, which includes BlueBay Asset Management and manages more than USD$330 billion in assets, surveyed 542 institutional asset owners and investment consultants in the United States, Canada, Europe and Asia.
Respondents underscored the importance of gender diversity on corporate boards, with 42 percent of institutional investors supporting shareholder proposals as an effective means to achieve that goal. As TriplePundit noted in a recent article, more women are serving on boards but parity is a long way off. The push from investors may help the trend gain more momentum.
From exclusion to engagementThe survey shows that negative screens (often excluding “sin” stocks such as alcohol, tobacco and firearms companies) are evolving into an increased focus on engaging with companies as a way to influence corporate behavior.
When asked in the context of the Fossil Fuel Free movement whether it was more effective to divest or engage, for example, 45 percent of the 2018 survey respondents said engagement is more effective (compared to 8 percent of respondents who prefer divestment).
Grasping the intangibleThis growing embrace of ESG principles is not a matter of altruism. Investors are waking up to the fact that ESG risks can impact the worth of intangible assets, which make up more than 80 percent of company value, as the Society for Corporate Governance reported in June.
These intangible assets include brand names, reputation, top managers, technological know-how and a loyal, well-trained and engaged workforce.
Investors lead the wayRegulation has been a driver in pushing European investors to adopt an ESG framework. In May, the European Commission unveiled its Action Plan on Sustainable Finance, a proposal which will introduce a regulatory framework supporting sustainable investment.
In the absence of any such moves by U.S. regulators, it is investors who have been taking the lead in making ESG integration mainstream.
Institutional investors, boards of trustees, consultants and other members of the investment ecosystem increasingly appear to understand the value of ESG integration and are demanding that it be incorporated into the investment process.
Image credit: LIBER Europe/Flickr
Based in Florida, Amy has covered sustainability for over 25 years, including for TriplePundit, Reuters Sustainable Business and Ethical Corporation Magazine. She also writes sustainability reports and thought leadership for companies. She is the ghostwriter for Sustainability Leadership: A Swedish Approach to Transforming Your Company, Industry and the World. Connect with Amy on LinkedIn and her Substack newsletter focused on gray divorce, caregiving and other cultural topics.