Nearly two thirds of institutional investors believe environmental, social and governance strategies will become an industry standard in the next five years, with around 55 per cent of companies planning to increase allocation to ESG during 2019, new research has found.
Natixis Investment Managers has published its ESG cross-survey report, using data from four of its global surveys of financial professionals, individual investors, institutional investors and professional fund buyers.
Currently, 65 per cent of fund buyers say ESG is part of their investment practices, the survey found.
The study found a consensus in the industry that there is alpha to be found in ESG integrated strategies, with institutions also believing the approach can mitigate exposure to governance and social risks not captured otherwise.
The consensus was stronger in Australasia than internationally: 61 per cent of Australian financial professionals, 81 per cent of professional fund buyers in Australia and Asia and 63 per cent of institutional investors in Australia and Asia agreed there is alpha to be found in ESG.
In contrast, globally, six in ten or 59 per cent of financial professionals, 57 per cent of professional fund buyers and 56 per cent of institutional investors believe there is alpha in ESG.
However, the survey noted a need for more advanced reporting and measurement. More than two thirds of financial professionals (68 per cent) globally, including 59 per cent of Australian professionals said they would be more likely to recommend ESG products if there was better data and reporting available.
Natixis chief executive Jean Raby said there are clear steps to take, including better taxonomy and labelling standards across the industry, and more transparency around climate and ESG reporting.
“As an active manager, we view ESG factors as inherently part of long-term, active investment strategies. Investors agree,” Mr Raby said.
“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.”
Natixis found around 28 per cent of institutions are relying on full ESG integration, 22 per cent are using exclusionary screening, 15 per cent employ impact investing and 15 per cent operate best-in-class approaches.
“In Australia, 55 per cent of investors said they invest with the purpose of making a positive social or environmental impact, and more importantly still, 66 per cent believe their decisions are having a real impact, which we hope means they will continue on the same ESG path,” Damon Hambly, chief executive, Natixis Investment Managers in Australia said.
“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 demand for ESG investing is also increasing among Australian super funds and other institutions, according to Louise Watson, managing director for the company’s Australian arm.
“Offering more investment options integrating ESG criteria could entice investors to save more, which could in turn lead to greater retirement security,” Ms Watson said.
“This is backed up by the survey data, which showed that 65 per cent of global investors think ESG investing will become standard practice in the next five years, up from 60 per cent 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.”
Four in five or 81 per cent of investors globally said the ability to customise their investments to meet their personal values was important.
Three in five (59 per cent) institutional investors and more than half (52 per cent) of professional fund buyers also identified the need to align investment strategies to organisational values as the primary reason for integrating ESG.
Mr Hambly commented that Australian investors are still mindful of the trade-off between performance and ESG investing.
“When asked about whether they even take their personal values into account when making investment decisions, a surprisingly high number of Australian investors (26 per cent) said they did not consider their personal values compared with only 19 per cent globally.
“It wasn’t all bad news though – only 42 per cent of Australian investors said they would compromise personal values for better performance, whereas more global investors (50 per cent) 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.”
Younger investors were found to be more enthusiastic about responsible investing, with the majority of millennial investors at 56 per cent and half or 48 per cent of Generation X saying they believe their investments can have a positive impact on the world.
In contrast, 41 per cent of baby boomers and 30 per cent of the silent generation before them said the same.
For professional investors globally, environmental considerations were the primary focus. Around three quarters (76 per cent) said they were most focussed on incorporating environmental factors into their investing strategy, followed by governance at 70 per cent and social at 61 per cent.
The findings were largely consistent with Australasia, with the exception of more investors choosing social considerations (68 per cent).
Professional fund buyers also honed in on environmental factors, with 80 per cent choosing it as their primary consideration, followed by 73 per cent choosing governance and 65 per cent for social.
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