Responsible investing awareness slowly growing

By Kate McCaffery | March 14, 2006 | Last updated on March 14, 2006
4 min read

Around the world, institutional asset managers say responsible investment considerations are coming to the forefront as globalization, as well as social and environmental issues, begin to have a larger impact on performance and the markets.

A survey of 157 money managers, conducted by Mercer Investment Consulting, found that environmental issues like climate change feature less prominently now in the investment-making process, but are tipped to grow in consideration within five years. Currently the top ESG (environmental, social and governance) factors managers are keeping an eye on are corporate governance and the impact of globalization. Nearly two-thirds of those surveyed believe the effects of globalization are material to asset performance while 62% think corporate governance is a relevant issue.

“I think these issues are becoming more commonplace in many realms. It’s not just that institutional investors are starting to see environmental concerns or human rights popping up in analyst reports, it’s also because these issues are in the mainstream press. The G-8 is focused on climate change. Look at what happened to New Orleans. There are so many things that are happening right now that these issues are starting to permeate consciousness, not just with mainstream institutional investors, but with society,” says Jane Ambachtsheer, global head of Mercer IC’s responsible investment group.

“I think advisors can expect their clients to ask questions about whether they can manage these risks, how they can do that and whether these risks are already being managed as they seek to ensure the long term security of their retirement savings.”

In Mercer’s 2006 “Fearless Forecast: What do investment managers think about responsible investment?”, Ambachtsheer says a substantially greater number of managers expect clean water, climate change and environmental management to have a material impact on asset performance in five years. These are beginning to replace consideration and concerns about corporate governance, globalization and terrorism.

“The relative dominance of globalization and corporate governance as material issues is falling compared to the other nine ESG factors,” she writes. “Environmental management pulls ahead of terrorism into third place, and environmental issues overall are expected to have a material impact on asset performance by a larger proportion of managers.”

In Canada, globalization, corporate governance and terrorism are currently the top three ESG factors managers consider. In the five year outlook, survey respondents say they expect climate change and the ability to access and use clean water will both replace terrorism in third place on the list of factors affecting returns. Human rights showed the largest drop in the survey of Canadian managers.

Along with the growing perception that such issues can be material to performance, the survey also shows that a significant proportion of managers anticipate increased demand from clients for these factors to be integrated into investment processes. Managers surveyed in all regions, except Singapore, anticipate a growth in client demand for specialist strategies as well, but the figures are moderate, ranging form 7% to 39%. Overall, almost four in 10 managers expect more clients will demand that ESG issues be integrated into mainstream investment decision making.

These expectations are not overwhelming, say the authors, but are rising across the board, with managers forecasting demand growth doubling in all regions, except Europe. U.S. managers remain the least convinced that such demand will materialize.

“Although managers predict that more ESG issues will become material to investment performance over the coming years, they are less convinced that clients will explicitly demand the integration of these issues,” say the report’s authors. They also say the view is consistent with the findings of a recent survey of 180 U.S. pension plans, endowments and foundations. “Although 75% of respondents indicated they believe that ESG factors can be material to investment performance, lass than half have either assessed or intend to assess (14% and 31% respectively) whether their external investment managers incorporate an analysis of ESG factors in investment decision making.”

For those who want to get more involved in ESG and socially responsible investing, there is a growing body of evidence that suggests these considerations will help portfolio performance over the long run, while at the same time encouraging companies to maintain a higher level of responsibility. On the other hand, many people still view socially responsible investment mandates as a means of limiting returns or handicapping a portfolio’s potential.

“It’s tough in Canada. There’s not a ton of available investment product that builds on the responsible investment approach versus the ethical investment approach,” admits Ambachtsheer.

“The roots of socially responsible investments are based on aligning ethics with investment. That created a problem for a lot of institutional fiduciaries who did not feel comfortable going down that road. That remains the case today. What has changed has been the evolution of what we call responsible investment, which seeks to integrate environmental, social and governance factors into investment analysis and decision making, based on the belief that these factors can impact corporate performance and should therefore be managed,” she says.

“So, I think Canadian individual investors have two options. One, look for investment opportunities that reflect an active integration of ESG risk, and two, support the development of additional opportunities like this going forward.”

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Kate McCaffery