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Institutional investors new to ESG say it outperforms

Nearly three in 10 of those surveyed increased the incorporation of ESG as a result of the Covid-19 pandemic

Almost all institutional investors that have just begun to integrate ESG into investment processes, prompted by the Covid-19 pandemic, said it provides better returns than non-ESG investments, according to a global survey by RBC Global Asset Management (RBC GAM).

In its 2021 Responsible Investment Survey, the asset manager found this was true for 97% of institutional investors who have placed more emphasis on ESG, versus 83% of respondents on the whole.

Overall, 805 institutional asset owners, investment consultants and investment professionals were surveyed.

Among the 29% that said they had placed more emphasis on ESG, eight in 10 said ESG integration helps generate long-term sustainable alpha compared with 51% of all respondents. Nearly nine in 10 (88%) said ESG integration helps mitigate risk compared with 61% of all respondents.

Split views on diversity

For those whose increased emphasis on ESG was linked to the pandemic, there was also a higher number – 70% – who said corporate boards should adopt gender diversity targets. The figure was 47% for all respondents, the same RBC GAM found in 2020. Interestingly, opposition to gender diversity targets increased from 26% last year to 35% this year.

Similarly, opposition to visible minority diversity targets had also increased from 28% last year to 35% in 2021. Those in favour of these targets stayed almost the same over the two years.

Shifting priorities

Institutional investors surveyed in the US, Canada, Europe and Asia considered anti-corruption, cybersecurity and climate change their top ESG concerns, RBC GAM noted.

Anti-corruption was also the top priority in 2020, however cybersecurity had gone up two places from fourth since 2020, and climate change has dropped a place since last year.

Regional differences

But the picture of priorities varied across regions – in 2021 80% of European investors addressed climate risk in their portfolios versus 32% in Asia, 31% in Canada and 20% in the US.

RBC GAM found said this regional variation could be linked to the regulatory environment in Europe with government regulations being a top reason for ESG integration for 45% of European respondents and 12% of global respondents.

Overall, ESG investing was found to be most popular in Europe where 96% of investors said they are likely to use ESG in their investments. In Canada, the figure was 81%, down eight percentage points from 89% last year. In Asia, ESG was used by 72% of respondents in 2020 and 76% this year. The US had the lowest uptake with 64% of respondents using ESG in 2021.

Fossil fuel engagement grows

The asset manager has seen a steady growth on the view engagement with fossil fuels is more effective than divestment. The figure rose from 39% in 2019 to 45% this year. In comparison, RBC GAM said 10% of institutional investors surveyed now indicated that divestment to be the more effective option.

My-Linh Ngo, head of ESG investment and portfolio manager at BlueBay Asset Management, an affiliated subsidiary of RBC GAM, said: “The findings suggest that for the most ESG committed investors, the Covid-19 pandemic has highlighted the critical importance of hardwiring environmental sustainability and social equality into their investment process.

“The pandemic has impacted governments, companies and individuals in unprecedented ways, and it will continue to reshape how society and the economy operates going forward. We think this presents a unique opportunity for investors to review and recalibrate how they incorporate ESG considerations into their investment practices.”

Melanie Adams, VP and head of corporate governance at RBC GAM said: “In a year where ESG risks such as Covid-19, high profile cyber breaches and climate-driven weather events dominated headlines, it will be interesting to see how perceptions toward ESG will continue to evolve.”