From individual investors to institutions, investors are turning to ESG investing to marry performance with personal values

From

Jean Raby

Appetite for environmental, social and governance (ESG) strategies is on the rise, as investors increasingly recognise the opportunity to generate alpha through ESG, but for professional investors reporting and measurement remains one of the biggest obstacles, according to a survey released yesterday by Natixis Investment Managers. The Natixis ESG cross-survey report leverages data from four global Natixis surveys of financial professionals, individual investors, institutional investors, and professional fund buyers.

The main findings revealed that six in ten (59%) financial professionals, including 61% of Australian financial professionals, 57% of professional fund buyers, (81% in Asia, which includes Australia) and 56% of institutional investors (63% in Asia, which includes Australia) believe there is alpha to be found in ESG, whilst also believing these strategies can mitigate exposure to governance and social risks not captured in traditional analysis. More than half (56%) of individual investors believe that companies that demonstrate a higher level of integrity will outperform those that do not.

Institutional investors continue to lead the way in the adoption of ESG strategies in their portfolios. Almost two thirds (66%) believe ESG will become standard practice in the next five years, up from 60% in 2017. And in Asia, which includes Australia, the number is much higher – 72% believe ESG will be standard practice within five years. Among those who implement ESG today, 46% say they believe this analysis is as important to their investment process as traditional fundamental analysis.

However, the survey also demonstrated the need for more advanced reporting and measurement. More than two thirds of financial professionals (68%) said they would be more likely to recommend ESG products if there was better data and reporting available.

“As an active manager, we view ESG factors as inherently part of long-term, active investment strategies. Investors agree. ESG-related investment strategies are now recognised beyond the narrow scope of negative screening with which it was once associated. Demand for ESG-related strategies is outpacing supply. As it continues to expand into a broader set of investment processes, investors will increasingly require greater clarity and definition on ESG strategies, how they are implemented, and what the benefits of ESG factors are on investment performance and on society more broadly,” said Jean Raby, CEO of Natixis Investment Managers.“There are some clear steps to take, including better taxonomy and labelling standards across the industry, and more transparency around climate and ESG reporting.

Professional investors leading the charge

Institutions are integrating a wide range of ESG strategies, most frequently employing ESG integration, which makes analysis of ESG factors part of their fundamental analysis process. ESG investing is also making in-roads in wholesale markets, where 65% of fund buyers say it is part of their investment practices. In this field, slightly fewer rely on full integration (28%) and exclusionary screening (22%), but larger numbers employ both impact investing and best-in-class approaches (15% each). 

Damon Hambly, CEO of Natixis Investment Managers in Australia commented: “As with most innovations in investing, institutional investors have been leading the charge on ESG. Six in ten already incorporate ESG in their portfolios and the majority (55%) plan to increase allocations in 2019. In Australia, 55% of investors said they invest with the purpose of making a positive social or environmental impact, and more importantly still, 66% believe their decisions are having a real impact, which we hope means they will continue on the same ESG path. Reporting is certainly a challenge, and many have called on the investment industry to provide the measurement and reporting they need, which will be to the benefit of investors across the board. The majority of Australian financial professionals (59%) said they would be more likely to recommend ESG if the reporting was better – a clear indication consistent, standard labelling around ESG should be an industry priority.”

 The demand for ESG strategies is increasing amongst Australian super funds and other institutions, according to Louise Watson, Managing Director of Natixis Investment Managers in Australia, who said: “ESG themes offer attractive opportunities from an investment perspective but also in terms of social responsibility. Offering more investment options integrating ESG criteria could entice investors to save more, which could in turn lead to greater retirement security. This is backed up by the survey data, which showed that 65% of global investors think ESG investing will become standard practice in the next five years, up from 60% in 2017. It’s therefore not surprising that local institutions are more and more cognisant of the need to incorporate ESG strategies into their portfolios.”

Younger investors lead the way among individuals

In contrast to older generations, the majority (56%) of Millennial investors and half (48%) of Generation X before them said they believe their investments can have a positive impact on the world. Only 41% of Baby Boomers and 30% of the Silent Generation said the same. 

Values hold sway on ESG

Across the investor groups surveyed, the findings reveal the importance of aligning investments to values, a particularly important consideration for individual investors – four in five (81%) said the ability to customise their investments to meet their personal values was important. Almost three in five (59%) institutional investors and more than half (52%) of professional fund buyers also identified the need to align investment strategies to organizational values as the primary reason for integrating ESG

Mr Hambly commented: “The trade-off between performance and ESG investing has often been a sticking point for investors, and it continues to be so. When asked about whether they even take their personal values into account when making investment decisions, a surprisingly high number of Australian investors (26%) said they did not consider their personal values compared with only 19% globally. It wasn’t all bad news though – only 42% of Australian investors said they would compromise personal values for better performance, whereas more global investors (50%) said they would. We hope that as ESG increasingly becomes standard practice, and allocations rise, there will be no need for trade-offs to be made.

Environmental considerations edge out Governance and Social

For professional investors globally, environmental considerations continue to be the primary ESG consideration. When asked to identify the factors they were most focused on incorporating within their investment strategy, more than three quarters (76%) of institutional investors selected environmental, followed by governance (70%) and social (61%). These global findings were consistent with those in Asia (including Australia), with the exception of social considerations, which were higher (68%). This focus is reflected by professional fund buyers for whom environmental factors are the primary consideration for four-fifths (80%), followed by governance (73%) and social (65%).

Read the full report.

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