Asset AllocationNovember 14, 2023

Allocators, Other Investors Divided on ESG Success

A survey finds them split over whether environmental, social and governance investments perform better or the same as others.

Reported by Larry Light

Investors are divided about the value of environmental, social and governance-minded investing, according to a survey by alternative asset management firm Dynamo Software. Respondents to the poll were almost evenly split on whether ESG-focused investments perform better (45%) or the same (44%) as non-ESG investments, with 11% saying they perform worse.

The global survey queried limited partners and general partners in investment funds, which included many asset allocators and managers, about all kinds of investments. The Dynamo report attributed the split to a lack of extensive metrics to assess an investment’s ESG bona fides.

While many ratings exist to assess how funds’ potential portfolio companies stack up as ESG-friendly, LPs and GPs are not satisfied with the raters’ lack of detail. Danielle Pepin, Dynamo’s vice president of product, explains in an interview that ESG ratings usually fail to explain how companies have changed over time, say, by tracking their history of carbon emissions. Another shortcoming: A company’s strong environmental record might overshadow its poor social history, such as treating its employees poorly.

This comes at a time when Detroit automakers are cutting back on producing electric vehicles, offshore wind power developers are canceling or delaying projects, and home solar panels sales are down. The largest ESG exchange-traded fund, which serves as an ESG benchmark, the iShares MSCI EAFE Growth ETF, is up 8.6% this year, trailing the S&P 500 (ahead 15.9%)

Perhaps as a result of a more sour view of ESG lately, U.S. assets under management in public equity ESG funds declined to $315 billion in Q3 2023 from $339 billion the quarter before, as seen in Lipper data, the report surmised.

Asked how important ESG ratings are to deciding on investments, many respondents (45%) said they were either “very important” or “extremely important/essential.” Another 37% termed ratings as “somewhat important.” Only 18% chose “not important.”

One clear message from the survey was that investors thought that “environmental factors appear to carry more weight than social and governance.” In general, they ranked carbon emissions as the top ESG metric to peruse, followed by energy efficiency improvements and water usage. When asked about their own funds, they ranked climate change/carbon emissions as most important, followed by energy efficiency improvements and then established business ethics.

The tilt toward environmental concerns also showed up in how the investors viewed diversity, equity and inclusion. Although DEI ranked as second most important behind the environment, the majority (68%) of investors indicated they are not allocating money based on it.

At the same time, respondents who showed their zest for environmentalism also carried some healthy skepticism. Some 60% said they were wary about greenwashing, when companies appear more environmentally conscious than they really are.