Environmental Social and Governance Incorporation by Institutional Investors

The integration of ESG factors in the practices of investment decisions is increasingly assuming a significant role in the international context. Institutional investors are more likely to invest in companies with businesses-driven ESG issues. A recent RBC GAM’s survey (2018) of institutional asset owners and investment consultants from the US, Asia, Canada and Europe (http://funds.rbcgam.com/index.html) highlights that ESG focused investing has become of age for institutional investors. Findings show that, at a global basis, 72% of institutional investors are using ESG issues as part of their investment approach and decision-making revealing an increasing of this percentage in comparison with a percentage of 66% last year. Institutional investors from USA show a more conservative approach to the application of ESG principles, but the percentage who reject ESG outright decreased dramatically year over year from 51% to 34%. The decrease by a third of the number of respondents who do not apply ESG principles shows an important trend in weakening the resistance to responsible investments and at the same time in increasing the number of investors who are adding elements of responsible investing to their set of tools. There is also a potential expectation about the increase of the institutional investors’ allocation to managers with ESG based investment strategies. One of the most crucial concerns of institutional investors considering the adoption of ESG principles is investment performance. Findings show that performance has become a key selling point because 38% of 2018 survey respondents believe that integrating ESG factors can help generate “alpha”, as it can be considered a measure of performance when a strategy, trader or portfolio manager has managed to beat the market return over the period. There is a key signal of a gradual acceptance of ESG- integrated portfolio as more investors are moving to the belief that ESG integration can generate some tangible investment benefits. In summary most of respondents (about 90%) believe that ESG-integrated portfolios are likely to perform as well or better than non- ESG-integrated portfolios. A pressing question on institutional investors’ minds is fiduciary duty. This survey demonstrated a starling turnaround because 54% of respondents believe that integrating ESG factors is part of their fiduciary duty. In addition, integrating ESG factors can also generate a lower risk and excess returns, hence this approach cannot longer be considered a public relation or a marketing exercise by the majority of institutional asset owners. Other key finding from the survey is that ESG analysis is moving beyond equities as 60% of respondents incorporate ESG issues into their fixed-income portfolios. Other crucial topic concerns gender diversity: 2018 survey findings show that most of institutional investors continue to believe that board level-gender diversity is important.