Social Investing Can Boost Performance, but Roadblocks Exist

January 23, 2006 ( - Three quarters of institutional investors recently polled say environmental, social, and corporate governance (ESG) factors can make a difference in how well an investment performs.

However, few of those in the Mercer Investment Consulting survey expect a stampede of institutional money managers to become converts overnight – instead predicting a moderate growth in socially responsible investing between now and 2008, according to a Mercer IC news release. The survey covered 183 institutional investors including US pension plans, foundations, endowments, and other long-term savings pools responsible for over $500 billion in assets under management

It was also clear from the Mercer data that the current pool of SRI converts is likewise limited. Almost a quarter (22%) are currently involved in SRI and another 6% expect to move in that direction in the next 24 months.

Those using SRI, the alignment of investments with organizational mission and beliefs, say it is an important driver of their investment decisions while other drivers include the need to respond to beneficiary and stakeholder demands and a belief that SRI can reduce risk and improve returns.

However, respondents admitted that the road to greater SRI adoption included a number of potential barriers:

  • a lack of demand from stakeholders
  • the belief that SRI could reduce returns and increase risk
  • the view that SRI is too costly in terms of money and staff time.

“Respondents’ views about socially responsible investing are clearly polarized, with SRI’s potential impact on risk and returns seen as both a driver and a barrier,” noted Jane Ambachtsheer, global head of Mercer IC’s Responsible Investment consulting business, in the news release. “This may be because, in its early stages, SRI decision making centered on negative screening techniques that reduced the universe of investments under consideration. Reducing, on nonfinancial grounds, the eligible number of securities in the investible universe is generally not viewed as an optimal solution by institutional fiduciaries.”

ESG Issues Affecting the Bottom Line

But the Mercer survey found that the landscape is apparently changing. The survey chronicled a growing belief among investors that responsible corporate behavior on ESG issues can boost companies’ financial performance – particularly over the long term. This leads investors to incorporate ESG factors into decisionmaking not on ethical grounds, but to optimize the risk/return equation.

Overall, a majority of survey respondents (61%) believe that ESG factors can be material to investment performance, with 14% believing that such factors are very material. Corporate governance is viewed as the most important ESG factor in mainstream decision making, with 64% of all respondents ranking it as very important.

Ranking second in importance is sustainability (39%), which refers to the concept of meeting present needs without compromising the ability of future generations to meet their needs. This is followed by employee relations (33%).

According to the survey, look for the institutional investors who have adopted some form of SRI to step up their activities in coming months by voting proxies and engaging corporate leadership on ESG issues. Active ownership is widely considered to be an investor’s responsibility and is increasingly viewed as a mechanism for mitigating risk and generating value over the long term, the survey said

Over the next two years approximately one-quarter of survey respondents plan to increase proxy voting (24%) and shareholder engagement (27%) activities. Proxy voting is set to increase most among plans with more than $5 billion in assets under management; shareholder engagement will increase similarly among plans of all sizes.

A full copy of the survey is  here .