Fewer than half (48%) of the institutional investors questioned by Hermes Investment Management for its annual Responsible Investing & the Persistent Myth of Investor Sacrifice survey say that they believe ESG factors produce better returns over the long term.
Some 104 institutional investors were surveyed for the results, which suggest a fall from the 56% rate achieved on the same question a year ago. Still, some 86% of these investors felt that corporate governance risks should be priced into investment analysis.
Saker Nusseibeh, chief executive of Hermes IM, said: “It’s clear from this year’s Responsible Capitalism 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.”
“The link between ESG considerations and financial value creation needs to be more clearly recognised. Companies that can adapt to social and environmental change are likely to deliver better long-term results for shareholders. For example, a company that harnesses big data to make industrial processes more efficient is in a better position than one relying on old and wasteful practices and companies that treat their staff well have a more productive workforce.”
A third of respondents, 33%, agreed that ESG risks with financial implications do not justify rejecting an otherwise attractive investment. But Nusseibeh commented further that there is a shrinking pool of buyers for companies with poor ESG records, while slightly more than half of pension funds surveyed, 57%, 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. There remains some confusion over the nature of ESG. People believe it naturally excludes certain areas that have done well in recent years – tobacco stocks, for example. However, this is to misunderstand ESG, which is about understanding the long-term sustainability of a company and having strong governance. It is about being aware of the risks.”
But the survey also found that fewer than half, 49%, would focus on the stewardship aspects of capital to encourage change, while the majority would still focus on maximising retirement income. But Nusseibeh added: “There is no point striving for a wealthy retirement if society has been destroyed by the ill-considered actions of companies who have been insufficiently held to account by their shareholders.”