Institutional investors increasingly see ESG as source of alpha: survey

As philosophies evolve on where ESG belongs in the portfolio, these factors have traditionally been viewed as a risk consideration, said My Linh Ngo, head of ESG investment risk at BlueBay Asset Management, in a webinar on Tuesday morning. However, seeking further alpha should absolutely come into play, she added. “It’s where the market has mis-priced or not priced at all for ESG factors. That’s where you can add alpha.”

Read: A look at Aon’s rating system for fund managers on ESG

The survey polled more than 500 institutional asset owners and investment consultants in Canada, the United States, Europe and Asia. Among those that do incorporate ESG factors, 50 per cent said it’s part of their fiduciary duty, up from just a quarter of respondents that said the same last year.

A key issue emerging from the 2018 survey is gender diversity on corporate boards. Nearly half (42 per cent) of respondents said they support shareholder proposals as a method for boosting diversity on boards. As for diversity targets, 63 per cent said they favour non-binding diversity targets. Among that group, 64 per cent indicated they support a target above 30 per cent.

Within asset classes, equities have been a traditional focus when it comes to ESG, with 84 per cent of survey respondents incorporating ESG into their equity strategies. But institutional investors are beginning look at other classes as well. Nearly two-thirds (60 per cent) said they incorporate ESG into their fixed-income strategies, while 43 per cent said they consider the factors in real estate, 36 per cent in infrastructure and 34 per cent in other alternative assets.

Read: Building a diverse workforce a major challenge in the investment industry

The most progressive asset owners are starting to see how ESG impacts their entire portfolios, regardless of asset class, said Judy Cott, head of corporate governance and responsible investment at RBC Global Asset Management.

The tendency to negative screen out certain problematic stocks, such as alcohol, tobacco or firearms companies, is also shifting. The survey found investors are adopting a broader range of approaches, focusing more on engagement with companies and having an influence on corporate behaviour. With regard to fossil fuel companies, 45 per cent of investors said they still believe engagement is more effective, whereas eight per cent said they prefer divestment.

Read: How ESG factors play into alternative investments

Negative screening is still a toll investors are using, however, with companies associated with cluster munitions and landmines the most likely (75 per cent) to be screened out,  followed by weapons generally (66 per cent), tobacco (60 per cent) and fossil fuels (42 per cent). As well, the survey found these screen outs can differ by region; for example, Canadians tend not to screen out fossil fuels as readily (23 per cent), while they make up the most widely used screen in the U.S. (62 per cent).

“The intellectual battle is being won slowly, we’re winning people over, but the impact is still slow in terms of how it affects portfolios,” said Habib Subjally, senior portfolio manager and head of global equities at RBC Global Asset Management. Making good businesses better has an economy-wide benefit, although it may be slow going and difficult to identify right away, but that’s the broader purpose of incorporating ESG, he said.

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