Two-thirds of institutional investors use environmental, social and governance (ESG) criteria as part of their investment approach and a quarter of them plan to increase their allocation to managers with ESG-based investment strategies within a year, according to a new report from Toronto-based RBC Global Asset Management.
In fact, 67% of survey participants employ ESG considerations when investing, yet these preferences differ by region, according to the results of the Responsible Investing: The Evolution of Ownership report. Specifically, 85% of institutional investors in Europe add ESG principles to their investment approach while 73% of institutional investors in Canada and 49% in the U.S. do the same.
Although Canadian survey participants’ views on ESG are similar to those of Europe, many Canadian institutions do not appear ready to accelerate their adoption of ESG-based strategies in the near future.
In fact, only 14% of Canadian institutional investors are set to increase their allocation to asset managers that incorporate ESG into their investment process within the next year, the report says. Comparatively, the figures in Europe and the U.S. were 49% and 25%, respectively.
However, it’s worth noting that 37% of Canadian institutional investors are unsure of their near-term plan in this area, which may suggest that further assets from these institutions could be ready to flow into ESG-based strategies in the future.
“Globally, we are seeing a clear trend toward greater awareness, interest and adoption of ESG analysis and responsible investing,” says Judy Cotte, vice president and head of corporate governance and responsible investment with RBC GAM, in a statement.
“This survey reveals that many institutional investors are actively discussing these issues within their organizations and with consultants and stakeholders,” she adds. “And while some institutions are moving at a cautious place, others are moving rapidly to adopt an ESG-based investment approach.”
The primary reasons institutional investors don’t incorporate ESG analysis is the lack of requirements to do some from their board of directors, the report says. Other common reasons are an unclear value proposition and a strong preference for financial analysis.
On the flip side, those who have adopted ESG criteria have done so for their clear value proposition, a preference for multiple analytical factors in the investment process and to comply with a clear board-level mandate or investment guidelines.
Canadian institutional investors, specifically, don’t include ESG principles in their investment approach mostly because of an absence of specific investment guidelines. Canadian institutional investors that do employ an ESG-based approach cite a mandate from their board or stakeholders as a critical reason.
Perhaps the biggest reason that institutional investors aren’t incorporating ESG analysis, globally, is that they’re still skeptical of its role as a strong investment tool. For instance, 32% of survey participants said they don’t consider the use of ESG factors as a way to mitigate risk in their portfolios while 20% were unsure. Moreover, 46% don’t consider ESG factors to be an alpha source while another 30% were unsure.
“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 impact investment performance negatively,” says Andrew Sweeney, institutional portfolio manager with RBC GAM, in a statement.
“This and other data from the survey reveal a high level of interest and curiosity about responsible investing, including areas of significant uncertainty,” he adds. “In today’s market, asset managers have an opportunity to utilize ESG analysis as they compete to add value for investors.”
RBC GAM surveyed 434 institutional asset owners and investment consultants in the U.S., Canada and Europe between July and August.