Two-thirds of institutional investors use environmental, social and governance (ESG) considerations as part of their investment approach, and 25% expect to increase their allocation to managers with ESG-based investment strategies within one year, according to a global survey by RBC Global Asset Management (RBC GAM). While these results suggest that responsible investing has moved into the mainstream, the survey also reveals how investors’ perceptions differ starkly by region; when it comes to ESG investing there are differences between investors in Canada and their counterparts in the U.S. and Europe.
RBC GAM’s survey reveals sharp differences among institutional investors as to whether ESG analysis can mitigate risk and drive alpha in a portfolio. Some institutions plan to increase their exposure to ESG strategies in the near term while others are holding back, unconvinced of its value and unimpressed with available data about corporate performance on ESG. The survey also uncovered broad disagreement over the proper role of shareholders, industry groups and regulators when it comes to improving corporate reporting and driving change on issues such as gender diversity among directors.
“Globally, we are seeing a clear trend toward greater awareness, interest and adoption of ESG analysis and responsible investing,” said Judy Cotte, Vice-President and Head of Corporate Governance and Responsible Investment at RBC Global Asset Management. “This survey reveals that many institutional investors are actively discussing these issues within their organizations and with consultants and stakeholders. And while some institutions are moving at a cautious pace, others are moving rapidly to adopt an ESG-based investment approach.”
Global Highlights
Responsible Investing: The Evolution of Ownership is the second annual survey of institutional attitudes and perceptions of responsible investing conducted by RBC GAM. This year, RBC GAM queried 434 institutional asset owners and investment consultants in the United States, Europe and Canada. The key findings from the global survey include:
- ESG is a global phenomenon – A full 67% of global respondents use ESG principles as part of their investment approach. By region, more investors in Europe (85%) than in Canada (73%) and the U.S. (49%) incorporate ESG analysis.
- Mandates (or lack of them) are key – The main reason (51%) given by institutional investors who do not incorporate ESG analysis is the lack of requirements to do so from their boards of directors. The other most commonly cited reasons are an unclear value proposition, and their strict preference for financial analysis. Interestingly, the inverse of these reasons was given by those who have adopted ESG – they do it for the clear value proposition, their preference for multiple analytical factors in the investment process, and to comply with a clear board-level mandate or investment guidelines.
- ESG analysis as an investment tool – Thirty-two percent of global respondents said they do not consider the use of ESG factors to be a way to mitigate risk in their portfolios, while 20% are unsure. Forty-six percent do not consider ESG factors to be an alpha source and 30% are unsure. This uncertainty opens up an opportunity for investment managers who utilize ESG analysis as they compete to create value for their clients.
- Poor information quality – For institutional investors who employ ESG criteria, a majority across all regions of the survey are not satisfied with the disclosure of ESG metrics provided by corporations. U.S. and Canadian investors prefer to allow shareholder proposals to do the work of improving disclosure. European investors prefer that government regulators require it.
- Gender diversity – A large majority of institutional investors in every region polled said gender diversity on corporate boards is important to them – 71% in the U.S., 80% in Canada and 68% in Europe. As with disclosure of ESG metrics, European investors prefer that government regulators require gender diversity; investors in the U.S. strongly prefer market forces to regulation; Canadian investors’ preference is split between shareholder initiatives and market forces.
- Changing Corporate Behaviour – Within the context of the Fossil Fuel Free movement, only 6% of global respondents said that divestment was more effective than engagement. In the U.S. and Canada, engagement is viewed as more effective than divestment. One-third of Europeans agree, but the same number view divestment and engagement to be equally effective. On the topic of exclusions more broadly, 48% of European respondents view negative screens as applicable across investor types; less than a third of U.S. and Canadian respondents agreed.
The Canadian Perspective
The survey revealed notable trends that differentiate Canadian institutional investors and consultants from their U.S. and European counterparts.
- Largely favourable views on ESG investing, more aligned to European than U.S. opinion: Seventy-three percent of Canadian respondents currently utilize ESG-based investment approaches “significantly” or “somewhat”; this is much closer to the adoption level in Europe (84%) than in the U.S. (49%). This level of adoption is supported by the view of a full 68% of Canadian respondents that ESG is a risk mitigator (versus 28% in the U.S. and 77% in Europe). Also, while only 21% of Canadian respondents consider ESG to be an alpha source, fully 41% are unsure (by comparison, opinions on that question are more settled in the U.S. and Europe, where only 24% and 21% of respondents, respectively, are unsure on this point).
- Decision factors: Canadian institutions stand out from their global peers in their reasons for – and reasons for not – applying ESG principles in their investment approach. Canadian respondents were less likely than their global peers to cite a lack of demand from their board or other stakeholders, and instead were more likely to cite an absence of specific investment guidelines. On the flipside, those Canadian institutions that do employ an ESG-based approach were more likely than their global peers (49% versus 31% in the U.S. and 39% in Europe) to cite a mandate from their board or stakeholders as a key reason.
- Near-term adoption trend is slow: Despite Canadian respondents’ views on ESG investing aligning more closely with Europe than the U.S., Canadian institutions do not appear poised to meaningfully accelerate their adoption of ESG-based strategies in the near term. In fact, only 14% of Canadian institutional investors plan to increase their allocation to asset managers that incorporate ESG into their investment process within the next year; the figures in Europe and the U.S. were 49% and 25%, respectively. Interestingly, a full 37% of Canadian institutions are unsure of their near-term plan in this regard. This may suggest that further assets from these institutions could be poised to flow into ESG-based strategies in the future.
- On fossil fuels, dialogue over divestment: The Fossil Fuel Free movement is noteworthy in the Canadian context given the large role of fossil fuel industries in Canada’s economy and capital markets. Interestingly, Canadian institutions are significantly more likely to view engagement with companies to be more effective than divestment (51% of Canadian respondents prefer engagement, versus 42% in the U.S. and 38% in Europe).
- The consultant’s role: In the survey questions specifically aimed at consultants, notable differences emerged in Canada. Canadian consultants were much more likely than their global peers to report being the initiator of discussions with asset owner clients about ESG (28% in Canada versus 8% in the U.S. and 9% in Europe). Another 60% of Canadian consultants reported that those conversations are being initiated by both them and their clients. This data suggests that responsible investing is an important topic of discussion between Canadian consultants and the institutions they advise.
“In Canada as in the U.S. and Europe, the most common question investment consultants are asked by clients about ESG is whether an ESG-based approach will negatively impact investment performance,” said Andrew Sweeney, Institutional Portfolio Manager at RBC Global Asset Management Inc. “This and other data from the survey reveal a high level of interest and curiosity about responsible investing, including areas of significant uncertainty. In today’s market, asset managers have an opportunity to utilize ESG analysis as they compete to add value for investors. While for consultants, opportunity exists for those that are able to offer guidance to their clients around the important and evolving topic of responsible investing.”