The Bank of Canada’s recent elucidation of climate change’s threat to the financial system is just the latest point in a growing trend toward appreciating ESG’s importance. Around the world, a groundswell of support among investors, along with an acceptance that performance doesn’t have to be compromised, has spurred the development and growth of ESG-oriented investment products.
But as Natixis Investment Management pointed out in a new report, not all ESG investing strategies are made equal. “Investors want investment performance, but they also want to see that investment selection actually helps achieve positive results on the values side of the scale,” the report said. “This will require the adoption of standards for measuring and reporting results.”
Drawing on previous research it conducted, Natixis noted that a majority of professional investors, including 59% of financial professionals and 56% of institutional investors, believe that alpha can be derived from ESG. However, it added, fulfilling performance assumptions goes beyond choosing and following an ESG index, requiring “significant expertise, deep company and industry analysis, and a highly active approach to portfolio management.”
The report also stressed the need for industry professionals to communicate ESG’s role in investment strategy, as opposed to what some might incorrectly assume is a “feel-good filter.”
Looking separately at individual and institutional investors, Natixis found that they had different motivations for engaging in ESG investment. Individuals, the firm found, use their portfolios in the same way as they use their wallets to express their values. Just as 63% of individuals seek to buy products from companies aligned with their personal values, 60% actively seek out investments aligned to their values. And as consumers, 59% of individuals actively avoid buying products from companies at odds with their personal values; as investors, 56% actively seek to avoid investing in such companies.
Sustainable investing has also gained a significant foothold in the institutional world, Natixis said. While six in ten institutions said they incorporate ESG into their decision making and analysis, they tend to cite more than one reason:
- To align investment strategies with organizational values (59%)
- To minimize headline risk (38%)
- Because it’s mandated by their investment policy (30%)
- To help generate higher risk-adjusted returns (20%)
While more people and institutions are embracing values-based investing, the firm said more can be done to achieve broader consideration and acceptance of ESG investing. Financial professionals must play a role by actively listening for how clients express their preferences, then determine which ESG strategies align with their goals. Industry stakeholders must also agree on consistent naming, definitions, standards, and reporting around ESG investing to have more meaningful conversations.
“ESG funds need to report on standard investment returns – as well as their progress against their sustainability goals,” the firm added.
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