ESG awareness not reflected in decision making

Hermes Investment Management has published the first in a four part series off the back of its second annual Responsible Capitalism survey. 

In the first paper, Responsible Capitalism and our Society, the results illustrate that while there is a growing awareness of environmental, social and governance (ESG) issues amongst institutional investors, this shift is not being reflected within investment decision-making.

The leading survey of over 100 institutional investors into responsible capitalism revealed a watershed moment in how institutional investors are embracing ESG. 99% of those surveyed believed fund managers should price in corporate governance risks as a core part of their investment analysis, alongside financial metrics.

However, while investors are displaying a growing awareness that focussing purely on financial gains is not enough, the survey also shows a tendency to behave contrary to this.

Saker Nusseibeh, Chief Executive, Hermes Investment Management, said: “The results are remarkable when you consider fifteen years ago ESG was considered to be ‘out-of-the-box’ thinking. It is clear that ESG has become mainstream.  However, the industry’s obsessive focus on measurement leads naturally to more short-term thinking and decisions that often miss the whole point of investment. This is to the detriment of the savers the industry is supposed to be serving.” 

Growing awareness of ESG undermined by short-termism

The survey shows the level of awareness around the importance of ESG issues is definitely growing. Seventy-nine per cent of respondents consider significant ESG risks with financial implications as sufficient reasons to reject an otherwise attractive investment.

Meanwhile, 79% of respondents consider significant ESG risks with financial implications as sufficient reasons to reject an otherwise attractive investment.

However, the survey found that reporting requirements such as IFRS17, the triennial valuation cycle and modern portfolio theory are driving pension schemes to think in short-term nominal returns, according to 44% of the survey respondents.

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