Forget all those studies about whether ESG strategies have produced better or worse returns. For institutional investors, the main advantage of environmental, social, and governance-oriented investing is that it makes them look good.
Seventy percent of roughly 500 institutional investors surveyed by Natixis Investment Managers said “improved image and reputation” was a primary benefit of incorporating ESG into their investment strategies.
It was by far the biggest advantage cited by the survey respondents, who were tepid regarding ESG’s effect on investment performance. Less than a quarter said incorporating environmental, social, and governance factors improved portfolio diversification, while only 18 percent said it enhanced their investment returns. Just 10 percent said ESG helped them manage volatility.
The survey included pensions, insurers, endowments, and foundations from North America, Latin America, the United Kingdom, Europe, Asia, and the Middle East.
Of this group of investors, 61 percent said that they currently run ESG strategies, while 55 percent planned to add more ESG investments this year.
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“Institutions, when we speak to them, right now they tend to be implementing ESG as a way of aligning assets with values,” said Dave Goodsell, executive director of Natixis’ investor surveying unit.
In fact, when asked about their primary motivations for incorporating ESG into their portfolios, 59 percent said it was to “align their investment strategies to meet their organizational values.” The second most popular response, given by 38 percent of respondents, was minimizing headline risk.
Still, 20 percent said they were motivated by the desire to generate higher risk-adjusted returns over the long term, while 18 percent identified ESG as an opportunity to benefit from new sources of diversification. One in ten investors said they wanted to use ESG factors to manage volatility.
“They’re seeing really important performance potential,” Goodsell told Institutional Investor by phone. “They think there’s alpha to be found. They think it can help in risk mitigation.”
Among survey respondents, 56 percent said they believed alpha could be harvested using environmental, social, and governance factors. Another 56 percent said they believed ESG strategies could help them mitigate risk.
Yet a substantial gap exists between the proportion of investors reporting that ESG actually helped their performance, and the proportion who believed that it might. Goodsell argued for greater consistency and clearer reporting to help bridge this divide.
Still, based on the survey, many institutions already consider ESG analysis a key part of their investment process: 43 percent said consideration of environmental, social, and governance factors was as important to them as fundamental analysis.
“They’re beginning to look at it as essential to what they do,” Goodsell said.