Institutional investors in the U.S. continue to view the application of environmental, social and governance (ESG) principles in investing more cautiously than other countries, but the percentage that reject ESG outright shrank dramatically year over year, from 51% to 34%, according to RBC Global Asset Management’s third annual Responsible Investing Survey.
Forty-three percent of institutional investors incorporate environmental, social and governance (ESG) factors into their investing, up from 22% in 2013, according to a report from Callan.
RBC’s global survey found a dramatic shift in attitudes toward ESG analysis is visible among U.S. institutional investors, as 24% said they believe an ESG-integrated portfolio would outperform its counterpart, nearly five times the percentage in last year’s survey. About 18% of U.S. respondents still said they believe the ESG-integrated portfolio would perform worse, but that negative sentiment is down from 26% in the 2017 survey.
One of the key issues in the responsible investing debate is whether ESG analysis should be considered a source of alpha, and U.S. investors reported sharply higher confidence in 2018, with 39% now saying ESG analysis generates alpha, more than double last year’s 17%. As the U.S. has been one of the biggest holdouts against wider adoption of ESG principles, this increase is a meaningful indication that opposition is eroding, RBC contends.
In 2017, just 28% of respondents said they thought ESG could be a risk mitigator; this year, that number climbed to 54%. The number of U.S. respondents who said otherwise nearly halved: to 24% this year from 50% last year.
The 2018 survey also shows a turnaround regarding the question of fiduciary duty. More than half of all respondents that incorporate ESG factors into their investment approach now say that doing so is part of their fiduciary duty, double last year’s level.
Equities have long been the primary focus of ESG analysis and investing and that remains true among many institutional investors according to this year’s survey: However, ESG analysis is moving beyond equities. Alternatives, which ranked fifth overall in ESG integration, came in third in the U.S. behind equity and fixed income and ahead of infrastructure and real estate. Thirty-percent in the U.S. said it is important to incorporate ESG into fixed-income. Asked directly whether they incorporate ESG into fixed-income management, 52% of U.S. investors that use ESG said yes.
As responsible investing has developed, the discussion about how to apply the principles in a portfolio has evolved from negative screens (often excluding so-called ‘sin’ stocks such as alcohol, tobacco and firearms companies) to a range of approaches that are more nuanced and more multifaceted. Discussions about exclusion have in many cases evolved and now encompass a range of different approaches to responsible investing. When RBC asked if respondents required asset managers to apply socially responsible screens to portfolios, 76% of all respondents said no. Resistance to such screens was higher in North America and the UK, where no more than 20% of respondents use screens.
“As industry acceptance of ESG integration has accelerated and becomes mainstream, there will be greater focus on ESG-related investment research and its application in the portfolio management process,” says Habib Subjally, senior portfolio manager and head global equities at RBC Global Asset Management (UK) Limited. “And as the demand for responsible investment solutions grows, asset managers and consultants will increasingly be called upon to offer guidance to their clients about responsible investing options that support their long-term financial goals.”