"It is striking to see that asset owners remain doubtful of ESG's efficacy even as so much capital pours into ESG-related investments," said Ben Yeoh, Senior Portfolio Manager at RBC Global Asset Management. "Clearly, many investors have yet to understand the financial benefits of ESG. That gap, between the empirical data and perception in the marketplace, represents an opportunity that can be exploited with thorough, fundamental analysis of environmental, social and governance considerations."
The survey reveals lingering uncertainty over responsible investing's ability to drive financial performance and mitigate portfolio risk. Despite a growing body of research to the contrary, only one third of respondents said they considered ESG to be a risk mitigator, and even fewer (30 percent) said they considered ESG investing to be a source of alpha. This may derive from investors' dissatisfaction with the amount of relevant data that companies are providing: 43 percent of respondents said they were somewhat or completely dissatisfied with the ESG-related information that companies make available.
"Technology, competition and other factors have made traditional equity markets hyper-efficient, and that's made alpha increasingly difficult to come by," said Habib Subjally, Senior Portfolio Manager and Head of Global Equities at RBC Global Asset Management. "But ESG remains an inefficient or at least immature market where, because ESG factors are not yet fully reflected in valuations, investors who understand how to identify and properly value those factors can still gain an advantage."
- Confusion and Frustration – Less than a third (30 percent) of respondents consider ESG investing as a source of alpha, which may indicate an inefficient market. 40 percent of respondents do not believe that ESG is a risk mitigator, reflecting broader uncertainty surrounding ESG investing. Only 17 percent of respondents said they were somewhat or completely satisfied with the quality and quantity of ESG-related data from companies, which may contribute to their belief that ESG investing is not a source of alpha.
- Negative Screens – The majority (52 percent) of respondents believe that negative screening tactics do not apply to a broad spectrum of investors. Screens appear to be more prevalent amongst mission-driven investors. Fewer than a third of respondents agree that negative screening impacts alpha, suggesting that for these investors, screening is more a philosophical decision than an alpha-driven one.
- Fossil Fuel Free – Nearly two-thirds (62 percent) of respondents believe the Fossil Fuel Free movement is a lasting investment issue. Given the popular support behind this movement in the form of trillions of dollars' worth of commitments to divest, investors cannot afford to ignore this type of negative screen as the movement may impact valuations over the long-term.
- Read the Proxy – 60 percent of respondents believe that proxy voting on the execution of ESG strategy is the portfolio manager's job, rather than proxy advisory firms or asset owners. ESG investing often involves a high level of human judgment that should not be left in the hands of objective outside analysts. Therefore, portfolio managers should be reading proxy statements, even when they use advisory firms.
- Top Stumbling Blocks – Respondents identified research and returns as the top stumbling blocks to increased focus on ESG by asset owners. Now is the time to capitalize on this inefficient market, as growing realization that ESG can drive compelling returns will draw more interest and capital.
About the Survey
RBC GAM distributed the survey to institutional asset owners, wealth managers and pension plan consultants in June 2016. Ninety individuals completed the survey. For a full copy of the survey results and analysis visit RBC GAM's ESG microsite.
About RBC Global Asset Management
RBC Global Asset Management (RBC GAM) is the asset management division of Royal Bank of Canada (RBC), and includes institutional money managers BlueBay Asset Management and Phillips, Hager & North Investment Management. RBC GAM is a provider of global investment management services and solutions to individual, high-net-worth and institutional investors through mutual funds, exchange-traded funds, hedge funds, pooled funds, separate accounts and specialty investment strategies. RBC GAM group of companies manage more than $295 billion USD and have approximately 1,300 employees located across Canada, the United States, Europe and Asia.