ESG is now mainstream for institutional investors and it’s working

Institutional investors are using ESG principals more than ever says RBC GAM

ESG is now mainstream for institutional investors and it’s working
Steve Randall

The use of environmental, social and governance (ESG) principles by institutional investors in Canada, the US, and the UK is rising according to a new survey.

The poll of institutional investors by RBC Global Asset Management found that more than 70% use ESG principles as part of their investment approach and decision-making process.

However, although the responsible investing market has seen rapid growth in the past two years, that growth has slowed in 2019 with the percentage of institutional investors using ESG principles as part of their investment approach and decision-making process relatively flat year-over-year. The share of investors adopting the approach did increase though in Canada and the UK.

Why the shift?

RBC GAM’s Responsible Investing Survey discovered that the approach is growing because asset managers see it as a way to enhance returns and mitigate risk.

Among those who are shifting more of their assets to an ESG based approach, mitigating risk and enhancing returns is the number one reason (cited by 53%).

"This new data confirms that while the multi-year trend of rapid increases in ESG adoption by institutional investors may be tapering off, the vast majority of these asset owners are still committed to using ESG principles in their investment process," said Melanie Adams, Vice President and Head of Corporate Governance and Responsible Investment at RBC GAM. "It is also noteworthy that institutional investors in the US, Canada and the UK, who already significantly incorporate ESG into their investment decision-making are more convinced than ever that this approach helps lower risk and increase returns, and these investors are committing a larger percentage of their portfolios to an ESG-based approach."

Active or passive?

Survey respondents were asked what share of their responsible investing portfolio is actively managed.

The results showed that, while passive management is a rising trend globally, the overall average level of institutional ESG-based portfolios that are actively managed is 61%, with 28% saying there entire ESG-based portfolio is actively managed compared to 10% that said it is passively managed.

Asked how they prefer to influence the behaviour of companies in which they invest, particularly in the context of the ‘fossil fuel free’ movement, 39% prefer to engage with corporate management rather than divest, although this was down from 45% in 2018.

"While institutional investors who already significantly incorporate ESG principles appear more convinced than ever before that this approach adds value, there still remains a lot of uncertainty around ESG in the broader marketplace," said Habib Subjally, Senior Portfolio Manager and Head of Global Equities at RBC Global Asset Management (UK) Limited. "With this increased uncertainty, asset managers, financial advisors and consultants will be called upon to offer guidance to their clients about responsible investing options that support their long-term financial goals."