Almost all fund managers have adopted some form of environmental, social and governance (ESG) analysis to enhance research but its influence on real investment calls remains unclear, according to a new Russell Investments global survey.
The Russell 2020 ESG study, which tapped the views of more than 400 asset managers in most regions including Australia and NZ, found “a marketplace that has reached universal recognition of the importance of ESG integration”.
“We believe that the industry is transitioning toward further embracing ESG integration, using broader inputs, ESG-specific data and dedicated resources,” the report says.
“At the same time, measurements of actual impact on investment decisions remain vague. When financial materiality of ESG-specific consideration is high, investors take such information into consideration. But anecdotally, such instances appear rare. The link between ESG effort and a direct tie to portfolio performance directly to ESG factors is weak, suggesting that ESG criteria are rarely a strong driver in overall investment decisions.”
About 36 per cent of respondents said ESG factors never dominate investment decisions (down from 45 per cent last year). However, if managers consider specific ESG factors as material they would influence investment decisions either to manage risk (39 per cent) or increase returns (24 per cent). Only 2 per cent said climate risk factors would play a major role in investment calls.
“Interestingly, climate risk concerns in isolation have little influence in most managers’ investment decisions,” the Russell study says.
(In another recent paper, Russell NZ analyst, Mihir Tirodkar, explains why the investment industry is still struggling to measure and incorporate climate risks.)
“And while it’s understandable that investors incorporate material factors into investment decisions, what remains unclear is how often such ESG considerations actually impact investment decisions.”
Furthermore, aside from products marketed as sustainable (or related labels), most managers don’t include ESG factors in investment performance attribution.
“Only 22% of the respondents have portfolio performance measures for portfolio managers and/or analysts with direct ties to ESG profile or climate risk criteria,” the report says. “This further shows that ESG profile accountability is weak among key investment professionals, suggesting that ESG impacts alone have less weight to investment performance outcome than the hype of ESG integration suggests.”
The study – authored by Russell global fixed income investment research director, Yoshie Phillips – also found significant ESG-related variations in how managers source and interpret data, report to clients as well as major differences between regions.
“We continue to believe that ESG factors are a component of broader investment considerations, rather than viewed in isolation. Our research demonstrates that the investment community is seeking better information, deeper resources, broader consideration and clearer regulatory standards,” the study says. “However, the key question remains – ‘to what degree’? The goal is to achieve the best practice ESG integration. Agreement on how to reach that goal? The world is clearly not there yet.”
Similarly last week, a Responsible Investment Association of Australasia (RIAA) and Mindful Money survey found almost half of respondents rated the lack of independent information as a barrier to ESG investing.
The online study of 1,000 New Zealanders also found most of those surveyed expected fund managers to follow responsible investment principles but only 2 per cent selected their current KiwiSaver scheme on sustainability grounds.
Over 40 per cent of respondents chose their bank KiwiSaver scheme while almost 20 per cent were in default funds and 11 per cent selected a provider they expected would be “best for financial returns”.
About three-quarters of those surveyed would consider investing in funds touting positive ESG impacts but only 16 per cent would tolerate lower returns to do so, according to the RIAA/Mindful Money report.