A new survey from RBC Global Asset Management finds mixed interest in responsible investing among institutional investors
By Belmont NewsBeat
Over the past half-decade, much has been written about the rise and importance of ESG investing — an approach that considers environmental, social and governance factors when selecting stocks, bonds, and other asset classes.
As a style of investing, its rise has been meteoric: Just five years ago, few among the investment community would have heard of the term, and very few would make public pledges to exclude ‘sin stocks’ such as companies that produce alcohol or tobacco, for instance, or would exclude cash-rich industries such as gaming or fossil fuels.
Fast-forward to 2019, and investors take seriously where their money is parked and how it is growing — last year Forbes estimated the amount allocated to ESG investments to be worth about US$20 trillion.
Has the bubble since burst? Recent research suggests so.
A study by RBC Global Asset Management unearthed that while more than two-thirds of institutional investors in Canada, UK and US use ESG principles as part of their investment approach and decision-making process, scepticism looms.
Following two years of rapid growth in the adoption of ESG investment strategies, growth slowed during 2019, the report claimed.
“The percentage of institutional investors who said they use ESG principles as part of their investment approach and decision-making process remained relatively flat compared to last year, at 70%,” the report said.
“However, on a regional basis, the percentage of institutional investors in the UK and Canada who ‘significantly’ or ‘somewhat’ adopt ESG factors continued to tick upward, reaching 97% and 80%, respectively. In the US, ESG adoption was flat versus 2018, at around 65%.”
The investment manager argues that whilethe multi-year trend of rapid increases in ESG adoption by institutional investors may be tapering off, the vast majority of these asset owners are still committed to using ESG principles in their investment process.
It adds that institutional investors in the Canada, UK and US, who already significantly incorporate ESG factors into their investment decision-making, are more convinced than ever that this approach helps lower risk and increase returns, and these investors are committing a larger percentage of their portfolios to an ESG-based approach.
Then why the plateaux?
The study unearthed significant doubts about the effectiveness of ESG strategies among some institutional investors: The percentage of respondents who believe an ESG-based portfolio will perform worse than a non-ESG-based portfolio increased from 10% to 18%. And, when also asked about ESG’s ability to mitigate risk, the percentage of respondents who said they were not sure rose to 24% this year from 18% in 2018.
“While institutional investors who already significantly incorporate ESG principles appear more convinced than ever before that this approach adds value, there still remains a lot of uncertainty around ESG in the broader marketplace,” said Habib Subjally, Senior Portfolio Manager and Head of Global Equities at RBC Global Asset Management (UK) Limited, in a recent press statement.
“With this increased uncertainty, asset managers, financial advisors and consultants will be called upon to offer guidance to their clients about responsible investing options that support their long-term financial goals.” Will their efforts be enough to entice new investors? Hopefully, yes. But perhaps not.
Implications for Asia
Commentators have been quick to note that the report surveys the views of just three markets. That said, they include two of the top-10 capital markets globally in terms of size: UK and US.
ESG investing is unquestionably on the rise in Asia. But the region lags significantly behind the West in terms of adoption (Singapore and Hong Kong excluded), and the growth rate of the investment approach within Asia is where countries such as the US and UK were a few years ago.
Nonetheless, scepticism of ESG is rife within pockets of the region, and any news confirming such sentiment within mature markets could dampen the views within Asia.