Asset Owners Say Integration of ESG has Significantly Improved Returns

State Street Global Advisors (SSGA), the asset management business of State Street Corporation, announced the results of a global survey of 475 institutions, which found that 68 percent of respondents say the integration of an environmental, social and governance (ESG) strategy has significantly improved returns, showing that the adoption of ESG driven investment strategies has a future in institutional portfolios.

The survey also found that 77 percent of respondents said they invested in ESG strategies because such factors play a role in a public company’s broader financial performance. While this growing integration of ESG strategies is a good sign, active ownership remains a critical part of the comprehensive strategy, as findings show that 78 percent of asset owners have some level of ESG engagement with the companies in which they invest taking ESG investment beyond negative screening.

“There’s a collective shift in the institutional investment world right now that has asset owners and managers thinking differently about the full implications of their investments,” said Chris McKnett, head of global ESG business at SSGA. “For the majority, the question is no longer, ‘should we consider ESG as part of our mandate,’ the question is ‘how are we actively pursuing opportunities with our investments that help us reach our financial goals, while encouraging change in the process?’”

Expectedly, all investment approaches face some type of challenges. Nearly two-thirds of respondents (57 percent) say it’s difficult to benchmark performance against peers. Fifty-six percent said the accurate assessment of external ESG asset managers was a key issue. Nearly half (49 percent) of asset owners say that fees and expenses are the main barriers to further incorporating ESG into portfolios, followed by a lack of internal knowledge on the matter.

“In the last four or five years, we’ve seen a marked increase in the level of awareness and interest in ESG at the institutional level, which is extraordinarily promising,” said Rakhi Kumar, head of ESG Investments and Asset Stewardship at SSGA. “There’s a broader appreciation of the notion that good governance translates into better management of areas such as a company’s carbon footprint, as well as how management engages with the workforce. The companies that operate this way, we believe, are better quality investments that yield better performance long term.”

Other Key Findings

  • Comparing ESG Appetites by Region – 40% of investors in Europe and 38% of investors in the US have 25–49% of their investments with ESG allocations. In Asia-Pacific, half of investors have less than 25% of investments with ESG allocations
  • A large majority of respondents (69%) say that pursuing an ESG strategy has helped with managing volatility.
  • Despite many surveyed investors expressing satisfaction with the performance benefits of their ESG strategies, overall ESG exposure remains low — on average only a third of adopters’ investments incorporate ESG criteria. Our results suggest that investors expect that proportion to grow over the next two years — to around 40% of their portfolio.
  • 84% of respondents are satisfied or very satisfied with the financial performance of their ESG strategy.

The full survey report can be viewed here (pdf).

About the survey

State Street Global Advisors surveyed 475 asset owners in the UK, France, Germany, Italy, Switzerland, Nordic countries, the Netherlands, Korea, Singapore, Japan, China, Hong Kong, Australia and the US. Respondents included public and private pension funds, endowments, foundations, family offices, sovereign wealth funds, central banks and supranationals. The survey was conducted in December 2016 and January 2017.

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