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U.S. and European investment managers tackle ESG

A recent study published in the Financial Analysts Journal, “Why and How Investors Use ESG Information: Evidence from a Global Survey,” researchers Amir Amel-Zadeh and George Serafeim analyze how ESG factors are used by a broad sample of the investment management industry.

While ESG investing has been more popular in Europe than in the U.S., the survey found that 75.2% of U.S. respondents said that they incorporated ESG information in their investment decisions. Comparatively, 84.4% of European respondents incorporated ESG information into portfolio construction. Among the chief reasons indicated by those that use ESG principles, 63.1% believed that using ESG information is material to investment performance. Comparisons between U.S. and European investment managers, both cohorts were similar in terms of client-related reasons for incorporating ESG factors, such as current or future client demand but the European managers came out ahead when it came to more virtuous goals. Of the respondents, 40.7% said they use ESG principles because it was the ethical thing to do while only 18.6% of U.S. managers responded positively to that option.

Engaging owners was the most popular ESG investment style, with 37.1% responding that it is their primary effort. However, European managers, at 48%, were more likely to engage than U.S. managers, at 27%. Full ESG integration into the stock evaluation process was the most prevalent approach by U.S. managers. Negative screening, removing low-score ESG companies from the stock opportunity set, was more prevalent (30%) than the more involved process of positive screening (13.4%), which requires deeper analysis and engagement. Despite this disparity, when asked about the future of the ESG investment process, respondents felt that positive screening will be the most important ESG investment style moving forward.

Issues surrounding consistent and reliable data surfaced throughout the survey. Of the 18% that said they did not incorporate ESG, one-fifth cited the lack of access to material non-financial data as a reason for not incorporating it into their investment process. Later in the study, the researchers ask what impedes efforts to make ESG an effective part of the process is the limited ability to cross-compare ratings between companies and the lack of reporting standards on ESG disclosures. Sentiments were similar between U.S. and European investors on these issues. The cost of gathering and analyzing data was also a notable impediment to ESG investing.