Most Canadian institutional investors believe ESG portfolios will outperform

Canadian institutional investors are now almost unanimous in expecting portfolios that consider ESG factors to outperform, but U.S. investors are increasingly skeptical, according to a survey from RBC Global Asset Management (RBC GAM).

The survey, which was carried out between June and August with 809 institutional investors, consultants and investment professionals around the world, found that 75% of investors now incorporate ESG principles into their investment process. This is up from 70% in last year’s survey.

It also found an overall rise in the proportion of investors who expect ESG-integrated portfolios to outperform, or at least match non-ESG returns.

In Canada, this belief in ESG portfolios is now nearly unanimous at 97.5%, up from 90% last year.

This surpassed long-time leader in ESG investing, Europe, where 96% expect ESG portfolios to outperform, up from 92%.

In Asia, confidence in ESG investing has jumped even further, up to 93% from 78% in 2019.

U.S. investors are trending in the other direction, with 74% saying they expect ESG-integrated portfolios to outperform. That’s down from 78% last year.

The survey also found that over 70% of investors in Canada, Europe and Asia expect ESG integrated portfolios to generate long-term sustainable alpha, and to mitigate risk.

Conversely, almost 60% of U.S. investors either don’t believe in their ability to generate sustainable alpha, or aren’t sure.

When it comes to mitigating risk, 53% of U.S. investors said that they believe it can help, compared with 87% in Canada, and 85% in Europe.

The top ESG concern for investors was corruption, the survey found, with climate change and shareholder rights in a close tie for second place.

“We are seeing investors concerned with a wide range of ESG factors, from anti-corruption to climate change and shareholder rights. By understanding the complexities of these factors on corporate value creation, investors can make better long-term investment decisions,” said Habib Subjally, senior portfolio manager and head of global equities at RBC GAM (UK) Ltd, in a release.

Additionally, the survey found that the Covid-19 pandemic has investors putting more attention on the social component of ESG — such as labour relations, supply chains, and diversity.

For instance, the survey found that 44% of investors now favour minority diversity targets for corporate boards, while 28% are opposed to targets.

Over half, 53% of investors want greater disclosure from companies about worker safety, employee health benefits, workplace culture and other social factors due to the pandemic.

“In this year’s data we are already seeing a greater demand for disclosure on employee health and safety and we expect that the effects of Covid-19 will have implications on investor sentiment for years to come,” said Melanie Adams, vice president and head of corporate governance and responsible investment at RBC GAM, in a release.

Alongside the growing appetite for ESG integration, the survey also found that investors are increasingly prepared to allocate funds to impact investing.

In this year’s survey, 40% said they’d expect to devote more funds to impact investing products in the next five years, up from 28% last year.