Numbers might not lie, but they certainly don’t tell the whole story. While returns are obviously important, they’re not the only consideration for a new generation of investors, as well as the asset managers with whom they engage.
Recent research from Boston-based research and consulting firm Cerulli Associates finds that “nonfinancial metrics are material” to 401(k), retirement and other forms of investment success.
It adds that investors no longer limit review of their assets to financial metrics such as revenue, profitability, or valuation. Strong environmental, social, and governance (ESG) practices can correlate with astute business procedures and positive financial performance.
“A growing percentage of asset managers proactively consider ESG factors in conjunction with financial analysis to identify risks and opportunity when investing in companies and evaluating their business practices,” Michele Giuditta, associate director at Cerulli, said in a statement. “Although many firms have adopted ESG principles, determining how to implement them remains a work in progress.”
More than half of consultants polled by Cerulli have dedicated resources for ESG manager research, and others are considering adding resources. Cerulli urges asset managers who are not taking ESG criteria into consideration to re-evaluate this decision.
“Institutional investors are taking ESG considerations seriously and making hiring decisions based on asset managers’ and consultants’ ESG resources and capabilities,” Giuditta added. “Survey data confirms that investors are becoming more ESG-aware. Investor demand is the top reason why alternative investment managers are taking ESG issues into consideration.”
Cerulli’s third quarter 2016 issue of The Cerulli Edge – U.S. Institutional Edition also explores the ongoing battle to safeguard against operational risk.