by RBC Global Asset Management
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The 2019 RBC Global Asset Management Responsible Investment Survey polled key decision makers, including institutional asset owners, wealth managers and pension plan consultants, around the globe on topics related to responsible investing, including ESG and impact investing. The survey results were released this past autumn and they revealed that 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.
In this edition of Insurance AUM, we’d like to present the survey findings that pertain to impact investing, use of ESG factors across asset classes, engagement versus divestment, and the availability and quality of ESG-related information.
Still Room to Grow in Impact Investing
Year over year, the number of institutional investors who held impact products in their portfolio was little changed. In the US, fewer respondents said yes (31.5% in 2019 versus 34.4% in 2018) to the question of whether they hold impact products and fewer respondents said no (44.9% versus 52.3%).
Notably, a significantly greater number said they were not sure (23.6% versus 13.3%)—suggesting a degree of uncertainty about what an impact product really is. In Canada, fewer respondents in 2019 said they held impact products than in 2018 (15.4% versus 16.8%), while more said they did not (52.9% versus 48%). In Europe and the UK combined, more investors in 2019 are using impact products than in 2018 (34.3% versus 31.2%), fewer are not using them (51.4% versus 52.5%) and fewer are not sure (14.3% versus 16.2%).
Do You Currently Hold Any Impact Products in Your Portfolio?
The story didn’t change much when respondents were asked if they planned to allocate funds to impact investing as opposed to ESG or socially responsible investing in the next one to five years. Overall, and across individual regions, more respondents said they were not sure than either yes or no.
These numbers were up slightly from 2018 (41.5% overall in 2019 versus 38% overall in 2018). Canada was the only region surveyed in which an increasing number of respondents said they planned to allocate funds to impact investing over the next one to five years—up very slightly to 18.4% from 17.5% in 2018.
Do You Expect to Allocate Funds to Impact Investing as Opposed to ESG/SRI in the Next 1-5 Years?
Equities Still the Prime Target for ESG Analysis
For institutional investors, equities remain the most popular asset class for incorporating ESG factors, followed by fixed income, real estate, alternatives and infrastructure. These rankings are largely the same as in 2018, but the level of use (as a percentage of respondents) changed somewhat.
While it may not be surprising that the classic asset classes of equities and fixed income remain the most popular for incorporating ESG, it is noteworthy that fewer investors this year are incorporating ESG into real estate and infrastructure, while more are going into “other” real assets.
Once again, regional breakouts illustrate how institutional investors around the globe think differently about these issues. In the US, the use of ESG factors in equities, fixed income and real assets increased, while real estate, alternatives and infrastructure declined from 2018 to 2019; but in Canada, ESG in real estate and alternatives increased while it decreased in infrastructure. In Europe including the UK, the percentage of investors incorporating ESG into equities and real estate declined notably, and increased in fixed income, infrastructure, alternatives and other real assets.
For Which of the Following Asset Classes Do You Incorporate ESG Factors Into Porfolio Management?
While a growing number of institutional investors worldwide are incorporating ESG factors into fixed income strategies, fixed income is generally viewed as less of a priority when put up against equities in the context of ESG.
Investors were asked whether it is important to incorporate ESG factors into both equity and fixed income strategies, and nearly half said both were equally important. About one-third said both were important but equities more so, and very few (1.6%) said both were important, but fixed income was more important. Perhaps most notably, a full 22% said neither was important, up significantly from 15.2% last year.
Engagement, Divestment or Negative Screens
For institutional investors using investment strategies informed by ESG factors, an important question comes down to whether to simply divest certain holdings or to engage with companies and work with corporate managers to improve environmental, social and/or governance practices and structures. In the context of the “fossil fuel free” movement, investors came down squarely on the side of engagement, as they did in 2018’s survey, but their enthusiasm for engagement appears to have cooled. To wit: in 2019, 38.6% of respondents overall said engagement is more effective than divestment, down from 45.1% in 2018. The number who said divestment is more effective edged up to 10.2% from 8.1%, and the number who said neither approach is effective rose to 11.8% from 8.1% in 2018. Those who said both methods are equally effective dipped to 16.4% in 2019 from 17.7% in 2018. In both years, roughly one-fifth of respondents were not sure.
Institutional investors in Europe and the UK combined had the highest regard for engagement, with 66.7% of them calling that method more effective than divestment, up from 54.3% in 2018. Canadian investors were second in this regard, at 47.4%, virtually unchanged from 2018. In the US, 33.8% of investors favored engagement, down from 38.8% in 2018, while 10% said divestment was more effective, up from 6.7% in 2018.
In the Fossil Fuel Free Context When Thinking About ESG Investing, Do You Consider Divestment To Be More Effective Than Engagement?
Related to the question of engagement or divestment is the use of negative SRI screens. As in 2018, three quarters of survey respondents overall said they do not require their external managers to use such screens.
For investors who require the use of negative screens, the most common ones are applied to cluster munitions and landmines, tobacco and weapons. These three screens were cited by nearly two-thirds of investors who use SRI screens, similar to 2018. Fossil fuel-related screens were the fourth most popular, with just under 45% of respondents who use screens listing that category.
Engagement requires information, and issuers are getting better, slightly and slowly, with both the amount and quality of data they provide investors. Ranking their satisfaction with the quantity of information on a scale of 0 to 5, with 5 being very satisfied, more investors landed slightly past the midpoint. A total of 12.8% of respondents answered either 4 or 5, up from 7.9% in 2018. On the other end of the spectrum, the number of respondents who answered either 0 (not satisfied) or 1 was 18.9% in 2019, down from 21.5% in 2018.
Quality of data was ranked on a similar scale and the results had the same pattern, with more respondents landing just past the midpoint. In 2019, 9.2% answered either 4 or 5 (very satisfied), compared with just 6.6% in 2018. Roughly one quarter of respondents—both in 2019 and 2018—ranked their satisfaction either 0 (not satisfied) or 1.
In comparison to 2018’s responses, it appears that more investors are satisfied with both the quantity and quality of ESG-related data; however, there is definitely room for improvement. Given this, the question becomes who should push for more and better information, and institutional investors by and large continue to see shareholders as the lead drivers in this effort, followed by government regulators, industry organizations and stock exchanges.
In 2019, roughly half of respondents cited shareholders, up from 46.2% in 2018. While government regulators ranked second again, the portion of investors viewing this group as a key driver fell to 21.8% from 27.2% in 2018. Industry organizations, on the other hand, drew more responses, 20.5% in 2019 versus 2018’s 17%.
In years past, stock exchanges played a major role in corporate governance, but as many have become for-profit companies, their focus has shifted more toward generating revenue, and institutional investors have taken note. Stock exchanges as drivers of influencing companies to improve the ESG-related information they provide were cited by just 2.5% of respondents, down from 4.8% in 2018.
Not surprisingly, equities and fixed income remain the most popular asset classes institutional investors are using with ESG. While there are some institutional investors who build ESG into other asset classes, such as real estate and alternatives, there is a lot of room for the industry to step up, not only with product, but with tools and resources for institutional investors to better understand how and why some of these other asset classes can play key roles in an ESG-integrated portfolio. This is especially the case when considering some of the major ESG-related issues that societies around the world are facing: the effects of climate change, housing shortages, infrastructure needs and income inequality, to name a few.
It is also important to consider what impact the macroeconomic investment environment, with highly valued stocks and rising volatility, low interest rates, global trade tensions and other unsettling issues, is having on these institutional investors. On the whole, the survey responses clearly showed that institutional investors are showing no signs of growing less engaged or committed to using ESG principles in their investment processes and decision making.