Most investors lack an understanding of how environmental, social and governance (ESG) factors impact their portfolio, according to a survey released by RBC Global Asset Management (RBC GAM).
Many investors remain unconvinced about ESG as a source of alpha or risk mitigation – creating a perception gap that smart, active investors and managers can exploit in order to gain a competitive edge.
“It is striking to see that asset owners remain doubtful of ESG’s efficacy even as so much capital pours into ESG-related investments,” says Ben Yeoh, senior portfolio manager at RBC Global Asset Management. “Clearly, many investors have yet to understand the financial benefits of ESG. That gap, between the empirical data and perception in the marketplace, represents an opportunity that can be exploited with thorough, fundamental analysis of environmental, social and governance considerations.”
The survey reveals lingering uncertainty over responsible investing’s ability to drive financial performance and mitigate portfolio risk. Despite a growing body of research to the contrary, only one third of respondents said they considered ESG to be a risk mitigator, and even fewer (30 per cent) said they considered ESG investing to be a source of alpha. This may derive from investors’ dissatisfaction with the amount of relevant data that companies are providing: 43 per cent of respondents said they were somewhat or completely dissatisfied with the ESG-related information that companies make available.
“Technology, competition and other factors have made traditional equity markets hyper-efficient, and that’s made alpha increasingly difficult to come by,” says Habib Subjally, Senior portfolio manager and head of global equities at RBC Global Asset Management. “But ESG remains an inefficient or at least immature market where, because ESG factors are not yet fully reflected in valuations, investors who understand how to identify and properly value those factors can still gain an advantage.”
Less than a third (30 per cent) of respondents consider ESG investing as a source of alpha, which may indicate an inefficient market. Forty per cent of respondents do not believe that ESG is a risk mitigator, reflecting broader uncertainty surrounding ESG investing. Only 17 per cent of respondents said they were somewhat or completely satisfied with the quality and quantity of ESG-related data from companies, which may contribute to their belief that ESG investing is not a source of alpha.
The majority (52 per cent) of respondents believe that negative screening tactics do not apply to a broad spectrum of investors. Screens appear to be more prevalent amongst mission-driven investors. Fewer than a third of respondents agree that negative screening impacts alpha, suggesting that for these investors, screening is more a philosophical decision than an alpha-driven one.
Nearly two-thirds (62 per cent) of respondents believe the Fossil Fuel Free movement is a lasting investment issue. Given the popular support behind this movement in the form of trillions of dollars’ worth of commitments to divest, investors cannot afford to ignore this type of negative screen as the movement may impact valuations over the long term.
Sixty per cent of respondents believe that proxy voting on the execution of ESG strategy is the portfolio manager’s job, rather than proxy advisory firms or asset owners. ESG investing often involves a high level of human judgment that should not be left in the hands of objective outside analysts. Therefore, portfolio managers should be reading proxy statements, even when they use advisory firms.
Respondents identified research and returns as the top stumbling blocks to increased focus on ESG by asset owners.