In a new report, “Everyone’s on the ESG Investing Bandwagon,” investment manager Natixis reports that last year, environmental, social and governance (ESG) investments took in a record $152 billion to reach $1.6 trillion in total assets. And asset managers launched a record number of ESG products: 196. Natixis’s findings are based on results in the U.S., Europe and Asia.
The percentage of institutional investors that implement ESG approaches rose by 18% from 2019 to 2021, while the number of fund selectors using ESG strategies rose from 65% to 77% over three years.
Natixis says one of the reasons ESG approaches are growing is that regulators are pressuring asset owners and asset managers to enact more sustainability measures. Investor demand for ESG investments is also rising. “Around the world, many countries are making great strides around sustainability by enacting regulations designed to further ESG goals,” Natixis says.
Meanwhile, institutional investors report a wide range of motivations for turning to ESG investing. In 2014, 48% of institutional investors said ESG approaches simply served as a public relations measure. However, in 2021, 57% of institutional investors said they were turning to ESG concepts to align their assets to organizational values.
Perhaps more significantly, in 2015, 50% of institutional investors said there was alpha to be found in ESG investing, but that has risen to 62% this year.
The top nine reasons why institutional investors say they are implementing ESG investing are to: align investment strategies with organizational values (57%), influence corporate behavior (35%), minimize headline risk (34%), generate higher risk-adjusted returns over the long term (29%), make the world better (26%), follow a mandate in the investment policy (25%), enhance downside protection (23%), benefit from new sources of diversification (17%) and access new return sources (11%).
As to why fund selectors say they are adding ESG approaches, the eight reasons they give are: investor demand (61%), to align investment strategies with organization and investor values (55%), firm mandates (35%), to generate higher risk-adjusted returns over the long term (25%), to benefit from new sources of diversification (23%), to minimize headline risk (22%), to access new return sources (18%) and to enhance downside protection (16%).
Fund selectors say investors are telling them they prefer ESG investments for six reasons: growing social awareness among investors (75%), because ESG has become more mainstream (50%), a desire to participate in the green economy (42%), climate change (36%), changing demographics of the client base (27%) and a need for better risk management (11%).
It seems that younger investors are more interested in ESG investments than their older counterparts. Asked whether they agree with the statement, “I want to make a positive impact with my investments,” 74% of Millennials say they do, compared with 71% of Generation X, 68% of Baby Boomers and 65% of the Silent Generation, which is the demographic preceding Boomers.
This also rings true when they are asked whether they agree with the statement, “I want my investments to match my personal values.” Eighty-three percent of Millennials say yes, while 82% of Gen X, 80% of Boomers and 74% of the Silent Generation agree.
As to what tools they use to measure ESG, both institutions (60%) and selectors (63%) rely on third-party rating and awards to gauge non-financial performance. Thirty-eight percent of selectors and 29% of institutions also rely on company and issuer reports.
However, in its report on ESG investments—“ESG: What Do Investors Really Care About and How Is It Changing in 2021?”—survey firm Procensus is not nearly as bullish as Natixis. Its survey also includes investors from the U.S., Europe and Asia.
“It is no secret that flows into ESG funds have been a key theme in markets for a few years, and, as a result, ESG factors are much more in focus for fund managers,” Procensus says. “But is everyone now on the bandwagon? Our data suggests not quite yet. … The biggest challenges/missing links in existing ESG research were seen to be poor data disclosure by companies, inconsistent scores and ratings by third-party providers, and lack of quantification of ESG considerations in financial modeling—so expect more lobbying of corporates to provide better ESG disclosure, and investors to continue to move away from third-party ESG data providers.”
Nonetheless, a majority of respondents said they expected ESG issues to become a more important component of their investment strategy as the world moves beyond COVID-19.
Asked which ESG issues have become top of mind for their investment strategy versus a year ago, 17% of institutional investors said climate change and carbon footprint, followed by diversity and inclusion (15%), supply chain resiliency (11%), health and wellness (10%), regulatory environment (10%), data privacy and security (9%), fair labor practices (9%), governance (7%), packaging and recycling (3%), product quality and safety (3%), and health care pricing and affordability (3%).
Procensus also carried out a poll on diversity and found that investors’ enthusiasm for diversity is well behind that of climate change. It said poll participants believe only 30% of investors care enough about diversity and inclusion (D&I) factors to integrate them into their investment decisions.
The firm also said 52% of survey participants believe that voluntary adoption of D&I targets is a more effective way to integrate those considerations into corporate culture. Twenty-seven percent said they believe a mandatory approach would be more effective. Investors said they would like to see corporations disclose D&I metrics in a consistent and comparable manner, have a clear strategy and communicate their plan.
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