More precise language about ESG investing and a more thorough conversation about the purpose it plays in portfolios may be the key to bridging the “gulf” between how professional and individual investors view its role and impact, according to Natixis Global Asset Management.
In a report based on a set of investor surveys it carried out last year, the asset manager said it found a “distinct split” in the views of professional and individual investors that challenges conventional thinking about environmental, social, and governance (ESG) investing.
Individuals believe the environmental, social, and ethical records of the companies they invest in are important, said Natixis, while professionals at institutions and within “the investment community” were more sceptical about the efficacy of these strategies, for example having concerns about performance measurement.
The professional investors included in the survey were managers of corporate and public pension funds, foundations, endowments, insurance companies and sovereign wealth funds.
“The real disconnect between the two populations may be based more on semantics than impact on investment performance,” said the asset manager.
ESG might be associated by many with ‘negative screening’ – excluding certain sectors from portfolios – Natixis said, without considering other strategies.
“For every negative screen, there can be another, potentially positive, opportunity to access return potential in companies that adhere to positive environmental, social and governance policies or within sustainable investing themes that are playing out across the global economy, and that’s something negative screening may struggle to capitalize on,” it said.
It surveyed defined contribution pension plan participants in the US last year and found that three-quarters wanted more socially responsible options included in their retirement plans.
This suggested ESG could be a catalyst to increasing retirement plan participation, according to Natixis.
However, it said the views of professional investors “who have not followed the evolution of ESG” could pose a challenge to implementing such strategies.
An ESG ‘mind-shift’
Matthew Shafer, executive vice president of international distribution at Natixis, said: “We need to ultimately get past the mindset that ESG is merely the act of blocking out companies through negative screens.
“It is clear that there are substantial opportunities for ESG [investing] and both individuals and institutions will agree that demographics shifts, burgeoning industries and sustainable growth initiatives are attractive on both an investment level and a social level. If enticing investors to save more by offering ESG elements is the catalyst that solves the savings crisis, then we need to start thinking ESG is here to stay.”
Shafer later told IPE a “good mind-shift” around the concept of ESG investing was already taking place to varying degrees across all investor types.
For example, six in 10 of institutional investors surveyed by Natixis last year predicted ESG would become standard practice for their organisation within the next five years.
A little over half said they believed an ESG strategy could help mitigate risk and generate alpha.
“This is a clear shift even from five years ago, although it should be noted that there is still a high percentage of respondents who did not share this view,” said Shafer.
The institutions responding to the survey ranked reporting on financial and non-financial performance as the top hurdle to successful implementation of ESG measures. Natixis GAM noted that major “fund ratings bureaus” and research organisations were introducing tools for monitoring and measuring ESG factors.
“We need tools that are accurate and with which professionals are comfortable using to measure various metrics, including performance,” said Shafer. “When this is in place we are then likely to see a greater change in attitude to ESG.”