Institutional Investors to Boost ESG Investments

Nearly 80% of asset managers and asset owners incorporate environmental, social and governance (ESG) factors into their decision-making, according to a survey from BNP Paribas Securities Services.

The report, titled “Great Expectations: ESG – What’s next for asset owners and managers,” found that among the asset owners incorporating ESG, 46% plan to invest at least half of their assets into funds that incorporate ESG by 2019.

“This represents a significant shift from today,” said the report, “where for 45% of asset owners and for 40% of asset managers, 25% or less of their funds is either invested in or marketed as ESG/RI funds.”

BNP Paribas also cited a trend of institutional investors “moving to the next level” by integrating their ESG investing “across their entire investment value chains,” after limiting their strategies to screening out the “sinful” sectors and/or companies.

When asked which component has the greatest potential influence on returns, 42% of respondents cited environmental factors. “We think this result shows that organizations are planning ahead to future legislation and the transition to a low-carbon economy,” said the report.

Investors’ concern for ESG issues varied based on geographic region, as “North American institutions are behind their peers,” said BNP Paribas. The survey found that 84% of investors in the Asia-Pacific region and 82% of European investors incorporated ESG into their investment decision-making processes, while that figure was only 70% for North American investors.

Although a rapid increase in the number of ESG funds coming to market is expected over the next two years, the report said that “barriers to even greater wholesale adoption remain,” adding that overcoming these barriers will require action in four key areas:

• Smarter Analysis: “A lack of robust ESG data is the biggest issue for asset owners and asset managers.” The emphasis must be on developing more rigorous and granular analytics, and stress-testing capabilities. This will assist the investment decision-making processes, bolster risk management practices, and demonstrate long-term performance benefits.
• Comprehensive Reporting: Investors need to understand every ESG-related risk and opportunity associated with the companies and sectors in which they invest. In-depth management and client reporting will also be crucial for firms to identify relevant ESG factors, monitor ESG-related risks, assess performance, and report on the impact of the investments.
• Talent and Teams: Firms will need to recruit or develop investment talent with the appropriate mix of skills. ESG factors need to be tightly integrated into investment decision-making from the outset. Firms will need to set explicit ESG investment objectives, and then construct an appropriate benchmark and portfolio that mirror those goals.
• Governance: Clear ESG investment goals and performance expectations, as well as policies to support these, will be essential. They should clearly communicate their selected objectives and policies to their asset managers.