After two consecutive years of significant increases in the use of environmental, social and governance (ESG) investment strategies and managers, the market is showing signs of maturing, with further growth in adoption slowing and an evident divergence of opinion about the value of ESG-based investing. The 2019 RBC Global Asset Management Responsible Investing Survey shows that, across the globe, the vast majority of institutional investors continue to embrace ESG principles and engage with their investment consultants and external money managers on the use of ESG-informed strategies. Among those institutions who apply ESG significantly, the belief in its value remains strong. However, those institutions who apply ESG “somewhat” or who have not yet embraced an ESG approach appear less convinced of its merits than before, or comfortable to remain on the sidelines for now.
One clear theme emerging from this year’s survey is an increase in the level of uncertainty around ESG. There appears to be a divergence of views about the value of ESG as it relates to investment performance, with significant adopters of ESG remaining confident in its value but the balance of the survey sample expressing more doubts in this area. Moreover, when asked about ESG’s ability to mitigate risk, the percentage of respondents who said they were not sure rose notably this year.
Still, while the rate of further adoption of ESG-based investing appears to have plateaued over the past year, the institutional investors who have adopted such an approach (and this group remains in the majority) remain committed to it. These adopters are clearly thinking deeply about key ESG factors such as using them across different asset classes, engagement and identifying the specific ESG issues—including cyber security, climate change, anti-corruption and water—that are most important to them.
Shifting Patterns of ESG Adoption
Following several years of rapid growth in the adoption of an ESG-based approach by institutional investors, this trend is showing signs of tapering. At a global level, the percentage of investors who said they used ESG principles as part of their investment approach and decision making in 2019 was relatively flat compared to last year, at 70%. On a regional basis, ESG adoption continued to tick upward in the UK and Canada, reaching 97% and 80%, respectively, while in the US, ESG adoption was flat versus 2018, at around 65%. At the same time, the percentage of global respondents who said they are not using ESG rose slightly to 30% this year, after having dropped to 27.8% last year from 33.4% in 2017.
It is noteworthy, however, that institutional investors who apply ESG principles are doing so to a greater degree: the percentage who report using ESG principles “significantly” as opposed to “somewhat” rose in 2019 in several key markets. The increase was small in the US (rising about 3% from 2018), more pronounced in Canada (up over 5%) and especially strong in the UK (up 30%). This data suggests that for institutional investors in these three regions who have adopted an ESG-based approach, they are more convinced than ever by the benefits they are seeing, and the trend continues to move incrementally toward going “all in”.
Figure 1: To What Extent are ESG Principles Used as Part of Your Investment Approach and Decision Making?
Considering these shifting patterns of ESG adoption, the next logical question to ask is what factors may be influencing the decision-making of institutional investors.
While the reasons survey respondents listed for either incorporating or not incorporating ESG remained largely the same from 2018 to 2019, slight differences point to a divergence of views on the value of ESG, particularly when it comes to enhancing returns and mitigating risk.
Last year, among survey respondents who already incorporate ESG principles, the most common reason cited for doing so was fiduciary duty. That was followed closely by the belief that incorporating ESG would help lower risk and increase returns. In 2019, those priorities flipped.
Performance—i.e., lower risk and improved return—is now the most-cited reason for incorporating ESG, cited by 53.1% of respondents this year, up from 52.8% in 2018, while fiduciary duty was cited by 50.4% this year, compared with 53.9% in 2018. (Respondents were able to select more than one reason.)
Responses to this question strongly indicate that investors who incorporate ESG into their investment decision-making view it as a strategy that can help lower risk, increase returns and help meet their all-important fiduciary duty.
Figure 2: What Are Your Reason(s) for Incorporating ESG in Your Investment Approach?
It is important to note that the increase in lowering risk and improving return as a reason for incorporating ESG did not come at the expense of fiduciary duty across the board. In Europe and the UK, for instance, the number of respondents who listed fiduciary duty rose to 64.9% from 56.2%.
These responses are interesting from another perspective: the investment policy statement. While more than half of respondents—in 2018 and 2019—cited fiduciary responsibility as a reason to incorporate ESG principles, less than one third cited investment guidelines.
Of course, the other interesting component in this discussion is the reasons investors give for not using ESG principles. This year, a belief that ESG is not consistent with fiduciary duty was cited by more respondents than any other reason. Overall, 32.9% of respondents cited this factor, up from 27% in 2018, when the No. 1 reason for not using ESG was a lack of resources. Interestingly, in 2019, limited resources were cited by just 19% of respondents, down from 29.1%.
The fact that this year there were slightly more respondents who said they do not incorporate ESG factors because they don’t believe these factors will materially impact their investment returns—21.9% versus 18.4% last year—could be another indication of rising concerns about issues of return and risk among 2019 survey respondents.
Figure 3: How Do You Believe ESG Integrated Portfolios Are Likely to Perform Relative to Non-ESG Integrated Portfolios?
Performance, performance, performance
A powerful indication of investors’ appetite for ESG is how they think ESG-integrated portfolios are likely to perform relative to non-ESG-integrated investments. As noted above, institutional investors who already heavily incorporate ESG principles are more convinced than ever before that this approach adds value in terms of enhanced returns and risk mitigation. Compared to last year, this group is more certain that integrating ESG factors can mitigate risk (agreement now at 93%, up 3% from last year), and also more convinced that ESG factors help generate alpha (69%, up 4%).
However, among the broader group of global survey respondents— including those who do not incorporate ESG as well as those who incorporate “somewhat”—this year’s responses showed growing uncertainty about the investment merits of an ESG-based approach.
This year, 28.9% of respondents said they thought an ESG-integrated portfolio would perform better than a non-ESG-integrated portfolio. While this is up considerably from the 18% who said better in 2017, it is down slightly from 30.9% last year.
This pattern echoed regionally, except in Canada, where 33.6% of respondents said an ESG-integrated portfolio would perform better than a non-integrated portfolio, up from 24.6% a year ago. That may not be surprising, given the fact that the use of ESG principles by Canadian investors increased by six percentage points from 2018 to 2019.
An important sign of investors’ sentiment toward ESG investing can be seen in the portion of respondents who think an ESG portfolio will perform worse than a non-ESG portfolio. Overall, this number increased significantly, to 17.8% from 10.4% in 2018. While fairly steady across the world, the number of respondents in the US who doubt the efficacy of an ESG portfolio rose to 22.1% from 18.4% last year.
Over the past few years, ESG investing has gained mainstream acceptance among institutional investors, but growth in the adoption of ESG has cooled. While a vast majority of investors continue to report using ESG factors as part of their investment approach and decision making, either significantly or somewhat, the rapid increase in adoption seen from 2017 to 2018 was not replicated in 2019. But as in the past, geographic areas vary in their levels of commitment to ESG.
Overall, the 2019 RBC Global Asset Management Responsible Investing Survey painted a mixed picture of how institutional investors are thinking of and using ESG factors in their investment approach. Those who have already adopted a strong ESG-based investment approach appear to be holding fast in their conviction about the value of ESG, including its merits in contributing to investment performance. However, outside of that group, uncertainty appears to be on the rise, and in many areas there were more investors responding “not sure” to certain questions this year than in the past.
So while the multi-year trend of increasing ESG adoption may be tapering off, institutional investors are showing no signs of growing less engaged or committed to using ESG principles in their investment processes and decision making.
If interested in receiving a copy of the full survey, visit: us.rbcgam.com/esg-impact/
By RBC Global Asset Management
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