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Skepticism remains over whether ESG improves investment returns — 2 surveys

Skepticism remains among institutional investors over the value added by incorporating environmental, social and governance principles into investment, finds two surveys on the topic.

RBC Global Asset Management's second survey, conducted in July and August of 434 institutional asset owners and consultants in the U.S., Canada and European Union, found skepticism is prevalent among investors in the U.S. Among U.S. respondents, 49% said they incorporate ESG into their investments, vs. 85% of EU-based respondents and 73% of Canadian respondents.

Half of U.S. investors do not think taking an ESG approach to investment mitigates risk, while 23% are not sure. On the flip side, 77% of Europe-based investors and 68% of Canadian investors think ESG mitigates risk.

U.S. investors are also unconvinced that ESG adds value. Only 17% said they see ESG as a source of alpha, compared with 22% in Canada and 51% in Europe. ESG investments are expected to perform better than non-ESG investments by 40% of European investors and 24% of Canadian investors vs. just 5% of U.S. investors.

The survey report, "Responsible Investing: The Evolution of Ownership," also found that 67% of global respondents use ESG principles as part of their investment approach. Gender diversity was highlighted as important for corporate boards by 71% of U.S., 80% of Canadian and 68% of European investors. However, the survey found a split in the preferred method of disclosure on the topic of gender diversity. European investors prefer a government regulatory requirement for disclosure; U.S.-based investors prefer that market forces drive disclosure rather than regulation; while Canadian investor preference is split between shareholder initiatives and market forces to encourage disclosure on gender diversity within corporate boards.

A separate paper by Hermes Investment Management, "Responsible Investing & the Persistent Myth of Investor Sacrifice," found that 48% of respondents believe companies that focus on ESG issues produce better long-term returns.

The survey, of 104 institutional investors, showed a drop in confidence in the role ESG plays in company performance, falling from 56% in the 2016 survey.

However, 86% of investors also believe money managers should price in corporate governance risks as a core part of their investment analysis.

"It's clear from this year's (survey) many institutional investors still view ESG as a tick-box exercise to keep risk managers happy rather than part and parcel of building a better future for retirees," said Saker Nusseibeh, CEO at Hermes, in a statement accompanying the survey report. "The link between ESG considerations and financial value creation needs to be more clearly recognized."

The survey also found that 33% of respondents do not believe significant ESG risks with financial implications justify rejecting an otherwise attractive investment — a figure that Mr. Nusseibeh said was "surprisingly high. There is a diminishing pool of buyers for companies with poor ESG records — 57% of pension funds believe the number of investment opportunities rejected on ESG grounds will increase. This should give those who believe that ESG criteria can stand independent from financial returns pause for thought."

The survey was conducted in June and July among U.K., European and Asia-Pacific institutional investors.