Allocators Still Skeptical That ESG Can Deliver Good Returns

Environmental, social and governance is very popular among pension plans and other institutional investors. But at the same time, according to a survey, many allocators still question how good ESG-oriented investing is at producing returns.

The annual institutional investors study by Schroders Investment Management finds that 58% of U.S. institutional investors said “performance concerns were a hinderance for sustainable investing.”

Their counterparts elsewhere on the globe were slightly less downbeat about ESG: 53% expressed such reservations, per the Schroders report, which covered 770 investors globally, 120 from the U.S.

Much of the investor skepticism can be linked to the tough times capital markets have encountered lately and a lack of clarity about what exactly ESG is, said Marina Severinovsky, Schroders’ head of sustainability for North America, in the report. “You’ve had a couple years of good performance, [and] now you’ve had a more challenging period of performance,” she added.

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What many investors had termed ESG stocks—namely, technology names—have underperformed this year, she noted. They aren’t doing well because of “larger economic dynamics” that have nothing to do with ESG, she said.

Before they invest in ESG, allocators indicated they wanted better data about sustainable investing, the study shows. Some 51% of U.S. institutional investors pointed to data shortfalls as a problem for them. “The marching orders for us as an industry … [are] that folks really do need more comparable data and more clarity of categories,” Severinovsky said.

Exponents of ESG argue that, regardless of current market gyrations, the strategy is wise because it steers investors clear of problems that stock issuers may suffer from environmental problems and the like.

“We think ESG is best because it lets you avoid risk,” says Mike Moran, senior pension strategist at Goldman Sachs Asset Management, in an interview. “In five to 10 years, there will be no ESG” designations in investing. Reason: Everyone will have adopted ESG behavior, he says.