You’ve heard about responsible investment (RI) and analysis that involves environmental, social and governance (ESG) factors — and maybe your clients are starting to ask questions.
But do you really understand RI?
This type of investing “has moved into the mainstream,” says RBC GAM’s 2017 RI survey, with the rate of adoption increasing, even if there’s little consensus on “key responsible investing issues.” For example, while many investors say incorporating ESG analysis can help mitigate risk, not all survey respondents were convinced of the value of RI, the report says.
The survey, which queried nearly 450 institutional asset owners and investment consultants within Canada, the U.S. and Europe, also shows that while “a significant number [25%] of institutions plan to increase (or establish) allocations to strategies that incorporate ESG factors in the near term,” others are turned off by lack of interest from their board of directors (51.5%), and what they perceive as a lack of good, comparable ESG data.
What’s more, clients are worried about their portfolios. RBC GAM says investment consultants were asked what ESG-related question clients brought up most, and more than three-quarters of all respondents cited, “Will returns suffer?”
Still, RI and ESG analysis aren’t passing fads. While Canadians are still mixed on the value of RI and the U.S. remains a tough market (more than half of U.S. respondents don’t expect to increase their allocation to ESG strategies this year), RBC GAM finds Europe is a growth area. In its survey summary, the bank says, “Europeans have the most favourable opinion of ESG investing, expecting it to help reduce risk, increase alpha,” and perform well.
During a panel discussion on Tuesday, Sustainalytics CEO Michael Jantzi also pointed to ESG investing growth in Japan, which he calls the “most exciting ESG market in the world right now, bar none.” Three other experts discussed the survey results alongside Jantzi: Julie Cays, CIO of CAAT Pension Plan; Nalini Feuilloley, head of Canada’s UN PRI; and Karen Lockridge, principal of RI for Mercer.
The Fossil Fuel Free movement, as RBC GAM refers to it, is also here to stay. Overall, 43% of survey respondents think it’s “a lasting investment issue”: the regional breakdown was 53% in Europe, 44% in Canada and 40% in the U.S.
That said, the survey finds only 6% of those polled say divesting is more effective than engagement, with 43% of all respondents preferring to work with corporate boards to effect change.
And the expert panel was in agreement. Feuilloley stressed that corporate boards need to continue embracing diversity, while Jantzi said regulators need to push harder by enforcing greater ESG disclosure. As RBC GAM concludes, and as the panel pointed out, the survey shows “more education about various strategies of RI […] is needed.”
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Responsible investment terms
In the executive summary of its 2017 responsible investing survey, RBC GAM offers the following definitions of common terms used in the ESG investing space.
ESG integration: “Inclusion of environmental, social and governance factors as a component of fundamental analysis to identify potential sources of alpha or risk reduction.”
Impact investing: “Allocating funds to earn a financial return alongside measurable social and environmental impact.”
Positive screening: “Using ESG measurements to select specific companies or sectors.”
Negative screening: “Using ESG measurements to exclude specific companies or sectors.” (This contrasts with engagement, as seen below)
Sustainability themed: “Building portfolios that only include investments that meet specific ESG criteria.”
Engagement: “Seeking to influence corporate behaviour through direct engagement, shareholder proposals, and proxy voting.”