Earth Day seems like a perfectly appropriate time to talk environmental, social and governance investing, and perhaps not coincidentally, there’s a big new survey out today on the topic that shows more financial institutions are deploying a broader range of ESG strategies to meet rising demand for more sustainable investments.
According to survey findings released today by Natixis Investment Managers, approximately three-quarters of professional investors, including 72% of institutional investors and 77% of the gatekeepers who select funds for their firm’s investment advisory platform, are now implementing ESG strategies, up from 61% and 65%, respectively, in 2018.
The pace of growth accelerated in 2020, amid record inflows into ESG funds and an unprecedented number of ESG product launches. This year, 68% of professional fund selectors plan to further expand their firm’s ESG offerings.
Their primary reason for doing so is because of investor demand, which fund selectors believe stems from investors’ heightened social awareness (75%) and the fact that ESG investing has now reached critical mass among mainstream investors (50%). Other factors they say are driving demand for ESG include investors’ desire to be part of a greener economy (42%) and concerns about climate change (36%).
“The rapid global adoption of ESG has raised questions about whether the momentum building around ESG will continue or if it’s building toward a bubble,” said Harald Walkate, Head of ESG for Natixis Investment Managers. “The answer lies in greater clarity about what investors ultimately want to achieve, not only to deploy ESG strategies that align with their values but also to set realistic expectations for both financial results and societal impact.”
Boston-based Natixis analyzed previously unpublished findings from a series of global surveys of institutional investors, professional fund selectors and financial advisors about how they are implementing ESG. When viewed through the lens of Natixis’ most recently published survey of individual investors, key questions emerge about ESG investing and whether professional investors, individual investors and their advisors are on the same page.
Stronger narrative of financial performance
Natixis found that 77% of professional fund selectors and 75% of institutional investors now consider ESG factors an integral part of sound investing. Financial advisors concur. Five years from now, nearly six in 10 (59%) financial advisors expect ESG investing to be standard practice across the industry.
Though a lack of consensus on ESG measurement has been a challenge for investors, 83% of fund selectors and 79% of institutional investors say it’s gotten easier to benchmark performance. As better ESG data has become available and reporting is standardized, Natixis sees a stronger narrative emerging on the financial merits of ESG investing.
- More than half of professional investors surveyed by Natixis, including 53% of institutional investors and 55% of fund selectors, now agree that companies with better ESG track records generate better investment returns.
- Seven in 10 fund selectors and 62% of institutional investors think alpha can be found by incorporating ESG factors into investment analysis. More than six in 10 (63%) advisors also agree that ESG strategies may offer potential to outperform the markets.
When it comes to evaluating a company or industry, nearly half (48%) of professional fund selectors consider nonfinancial ESG factors to be as important as fundamental financial factors. Yet 67% of fund selectors and 74% of institutional investors say it is still hard to know which nonfinancial measures are material to investment analysis.
Matching motives with methods
Institutional investors’ top motivation for implementing ESG is to ensure assets better represent organizational values, which has been their top motivation since 2017. Aligning assets and values also is a top motivation for fund selectors, second only to client demand.
Three-quarters of individual investors (77%) previously surveyed by Natixis say it’s important that their investments and values are aligned. Moreover, what investors say they want most out of a relationship with a professional advisor is to have them identify investments that match their personal values. What they mean by that, exactly, is important for financial firms to understand as they expand their ESG offerings and tailor their strategies to best meet clients’ goals—both financial and nonfinancial.
“For advisors, it’s not always clear what clients mean by personal values or whether ESG investors are primarily motivated by a desire to make a better world or better financial returns, or both,” said Dave Goodsell, Executive Director, Natixis Center for Investor Insight. “Ultimately, more concrete evidence of financial and nonfinancial results is needed, but questions and conversations about clients’ motives could go a long way toward helping advisors tailor the best ESG strategies to meet their clients’ objectives.”
Natixis’s research found no single consensus approach to ESG investing. Rather, firms are employing multiple approaches, with distinct risk-return features, that allow them to tailor strategies and address different financial and nonfinancial objectives.
The survey shows the approaches professional investors are taking include:
- Integration: The most widely used approach, taken by 54% of fund selectors and 48% of institutional investors, is to integrate ESG factor analysis into the overall investment process, accounting for issues that with potential to materially affect company performance.
- Negative screening: Four in 10 fund selectors (42%) and institutional investors (40%) rely on negative screening. The exclusion of companies or industries deemed as unethical or harmful, an approach taken by early adopters of socially responsible investing in the 1970s, fell out of favor with many investors for lack of compelling evidence that it produced either a financial or societal benefit. The number of fund selectors employing negative screening declined by 15% from 2019 to 2020.
- Active ownership: More than one-third of professional investors, including 35% of fund selectors and 34% of institutional investors, are addressing ESG issues by exercising their ownership rights and voice to effect change, an increase by 45% and 51%, respectively, in 2020 from 2019. Meanwhile, 35% of institutional investors say one of the primary reasons they implement ESG strategies is to influence corporate behavior.
- Impact investing: 42% of fund selectors, but just 34% of institutional investors, are engaged in impact investing, with an intent to generate and measure social and environmental benefits alongside financial returns.
- Thematic investing: 43% of fund selectors and 28% of institutional investors focus on thematic investing, which seeks opportunities in emerging trends such as those driven by demographic shifts, innovation and social or policy priorities.
Natixis Investment Managers surveyed 3,600 professional investors globally, including 500 institutional investors, 400 fund selectors and 2,700 financial professionals, about the issues that drive their decisions on ESG investing. Data were gathered in 2020 by the research firm CoreData, with supporting data points from prior-year surveys, including 9,100 individual investors from around the world who were surveyed in 2018 and 2019 about aligning investments with their personal values.
A download of the full report, “ESG Investing: Everyone’s on the bandwagon,” is available here: www.im.natixis.com/us/research/esg-investing-survey-insights-report.