Appealing to Ethics Won’t Win Managers Over to ESG. Money Will.

Only half of the respondents to a recent survey believed that incorporating ESG factors into their investment strategies was an ethical responsibility.

Illustration by II

Illustration by II

Not surprisingly, for many asset managers, the amount of importance they place on environmental, social, and corporate governance in their investment analysis isn’t motivated solely by altruism. According to research from New Zealand’s University of Otago, when it comes to ESG — at least for retail investors — these managers are motivated more by the potential to outperform than by ethics.

The Otago paper, entitled “In Holdings We Trust: Uncovering the ESG Fund Lemons,” was based on a survey of asset managers of global equity funds that are available to retail investors in Australia and New Zealand. The authors sent the survey to 105 asset managers headquartered around the world and received 43 eligible responses. Respondents were asked to identify their firm’s flagship ESG global equity fund and to explain how and why they integrate ESG information into their investment decisions.

“There’s always been a concern in the back of my mind that funds may be saying that they’re engaging in certain practices, or trying to be responsible, in order to attract customers that are motivated by those things,” Sebastian Gehricke, a senior lecturer at the University of Otago and co-author of the report, told Institutional Investor. “But then what are they actually doing? What does that mean? What are customers getting?”

The authors found that responsible investing at asset managers was primarily driven by fund flows and performance, as opposed to ethical considerations. According to the report, 81 percent of respondents said they consider ESG information in their investment decisions because the insights are material to performance, 74 percent said that it was due to growing client and stakeholder demand, and 67 percent said it was based on risks and opportunities that could affect future returns. Meanwhile, a little more than half, 51 percent, of the asset managers said they see it as an ethical responsibility.

“It seems that, not surprisingly, most fund managers are motivated [primarily] by potential performance improvement by incorporating ESG, and [then] by the growing demand from the clientele,” Gehricke said. “Both of those are value motivations — trying to improve the value either to clients through financial performance and therefore [themselves] through fees or just [for themselves] by attracting flows.”

Gehricke said that one risk of these motivations is that to attract clients interested in ethical investing, funds could potentially overstate their ESG efforts — a form of greenwashing.


Broken down by location, 36 percent of the respondents were based in Australia, 27 percent were in New Zealand, and 23 percent were in the U.S. When the authors analyzed the survey responses by region, they found that the difference between the importance of performance versus ethical values when it came to incorporating ESG practices into the investment process was higher for firms based in the U.S. — 81 percent of all respondents from all regions said that ESG information is material to investment performance, while 89 percent of U.S.-based respondents said the same. Conversely, only 11 percent of U.S.-based respondents said that they see ESG integration as an ethical responsibility, compared with 51 percent of respondents from all regions.

“This isn’t conclusive evidence, but if you take this in conjunction with evidence that’s been found in other studies and literature…the U.S. has lagged the [European Union] in their push for ‘greening’ the economy,” Gehricke said. “Also, the cultural differences are quite strong in that way, especially in how the financial markets behave.”

Gehricke said that the survey results — in conjunction with other literature — show that an approach based on performance and potential flows to ESG funds may be stronger in the U.S. than in other regions, where asset managers may incorporate more of a mix of business value and ethics. He also said the regional disparity is driven by differences in regulatory pressure, cultural demographics, and understanding of these issues.

“Our survey [showed that responsible investing] (RI) was largely driven by expected value (performance-based expectations and client demand), rather than [by] values (having an ethical responsibility to make a positive difference), particularly for institutions that are based in the United States,” authors Gehricke, Lachie McLean, Ivan Diaz-Rainey, and Renzhu Zhang wrote.

The authors also asked survey respondents to divide a hypothetical 100 points between environmental, social, and governance factors, based on the importance of each category in their fund’s investment process. They found, on average, that the managers and funds in the survey placed the most importance on environmental themes, followed by governance and then social issues. The authors concluded that this was likely the result of rising stakeholder and policymaker pressure to tackle environmental issues.

The authors also found that, on average, funds with headquarters in the U.S. put a higher weight on environmental themes, while funds in Australia and New Zealand placed equal emphasis on environmental and governance issues.

“Given that respondents with U.S. headquarters were primarily motivated by financial performance, it is likely that they prioritized environmental themes [because] there is better data and stronger links to performance, relative to social themes, which is driven by rising consumer demand through climate change awareness,” the authors wrote.