ESG investing is growing in popularity, as Sofie Gravers Jacobsen analyses the results from Kirstein’s investor survey

Our recent Pan-European ESG Investor Survey has uncovered and identified the main ESG investment expectations among European investors as well as the main arguments for and against ESG investments as perceived by European investors.

We spoke to 81 institutional investors about their ESG investment expectations. In total, 75% of the investors indicated the found ESG issues of high relevance. And the trend is growing. Investors who admit to having previously placed less relevance on ESG issues now indicate that they are looking to increase their focus on the issues and allocations to ESG. The relevance placed on ESG in terms of asset classes is fairly uniform across Europe. On equities 83% of the investors found ESG to be of high importance.

So equities remain the asset class with the highest relevance for the investors. But fixed income and alternatives are gaining ground and receive all the more attention from the investors. In total, 58% of the investors we talked to said they found ESG very relevant on fixed income.

Equally, as many as 51% of the investors perceived ESG to be of high relevance to their investments on alternatives. In other words, ESG is becoming more mainstream among European investors and is perceived as relevant to all asset classes by an increasing number of investors.

Arguments against
We found that, when asked, the investors’ main argument against ESG investments was linked to the perceived uncertainty as to what exactly ESG means. That is, it is somewhat interesting that investors’ main argument against ESG is not directly investment related - but had more to do with their uncertainty in the interpretation of ESG. This also explains why lack of experience is one of the main arguments against ESG.

The argument that ESG is costly to implement is widely recognised among investors, though the burden varies somewhat according to the size of the investor. We found that the larger investors conducted a lot of the necessary research themselves whereas some of the smaller investors collaborated and conducted joint research so as to spread the costs.

However, a lot of the investors acknowledged that dealing with ESG issues is resource-intensive - and is part of the game so to speak.

Arguments for
Investors were fairly uniform in their views on arguments in favour of ESG investments. Compliance with the board’s as well as the clients’ opinion is considered the most important argument in favour of ESG. For pension funds that are owned by labour unions this is of particular relevance - but increasingly across the board, pension funds react to the state regulatory requirements. Compliance is perceived as a tool for more strategic purposes - compliance is seen as a means to avoid negative press or in other words to comply with public opinion about what are acceptable investments.

Surprisingly, one of the main arguments listed for ESG investments is the contribution to sustainable development. Investors across Europe mentioned that they saw it as their ‘duty’ to demonstrate a responsible side of their organisation.

On investment results the investors indicated that they believe ESG can improve long-term investment whereas few argue that it can improve short-term investment. And following in line with that argument for ESG investment is the perception that it is considered a tool to reduce risk in their portfolio. They arguably view it less likely that ESG investments will result in major catastrophes like BP’s environmental damage to the Gulf of Mexico. Some even argue that ESG had helped them avoid risky investments.

To sum up, it is acknowledged that ESG is costly to implement, and requires resources and know-how, but the European investors are willing to bear the costs, since they perceive their ESG investments to carry less risk and produce long term returns. When asked, more than 40% of the investors indicated that they had allocated a specific budget to ESG. Research and external consultants were often indicated as ESG related expenses.

A consequence of the perception that it reduces risk in the portfolio and is considered a long term investment is that investors are becoming more ambitious on ESG. So though negative screening remains the most common tool for investors and is considered the simplest form of implementing ESG, it is for a lot of investors no longer sufficient. The investors are becoming more ambitious and require more of their ESG investments. Close to two-thirds of respondants engaged in active ownership. Active ownership or engagement with companies is perceived as a means by which investors may influence the company into more ESG related behaviour. The idea being that taking an active part in the company will have a positive effect on sustainability. For more than 85% of investors who engage in active ownership, this is carried out in a working relationship with external partners, consultants, and/or asset managers.

So the more ambitious the investors, the more involvement of external partners and managers is seen.

Implementing ESG
So while there are great expectations to ESG investments going forward, there are great expectations on managers. In our research, we asked investors in-depth questions as to the responsibilities they had to their managers and, not least, potential managers. This fairly new area and the acknowledged uncertainty that they experience means all the more demands on asset managers.

Managers, therefore, have a role to play; a big one if they are prepared to listen to the investors’ requirements.

ESG affects the choice and selection of asset managers. Our research indicates that there is a strong correlation between ESG impact on manager choice and importance of managers’ view and handling of ESG issue. Though our research indicates that there are in fact some managers who are viewed as front runners on ESG - there are also a lot of investors who indicate they are still waiting for the managers that really stand out in the field.

Our research confirms that ESG investments are considered highly relevant to the investors and that they have great expectations going forward not least for their own ESG initiatives but also for those of their managers.

Sofie Gravers Jacobsen is senior investment analyst at Kirstein Financial Market Research. Please contact her on sofie.jacobsen@kirsteinfinans.dk for more information about the study.