BNP Paribas Asset Management (‘BNPP AM’) reveals key findings of its study on the importance of ESG criteria for investors in the Covid-19 environment:
- ESG has become an even greater focus for 23% of respondents: 81% of respondents already employ ESG in all or part of their portfolios and a further 16% plan to do so
- Clear emergence of the importance of social considerations highlighted by an increase of 20 percentage points since the onset of Covid-19
- 79% of respondents cite social considerations as having a positive impact on long-term investment performance and risk management
- However, there are significant barriers to investing with consideration to social factors: 42% of respondents highlight lack of established standard metrics
The COVID-19 crisis has highlighted the need for greater awareness of social considerations in investment decision-making. To better understand investors’ approach to social considerations, BNPP AM sponsored a recent ESG study conducted by Greenwich Associates(1). The study showed that 81% of respondents already take ESG considerations into account in all or part of their portfolios, with a further 16% planning to do so. The leading reasons were to positively impact society or the environment (80%), reduce risk (58%) and meet stakeholder needs (47%).
Why ESG factors generally, and social considerations specifically, will become more important
BNPP AM’s market study highlights the extent of changing perceptions of the importance of social considerations, with a substantial increase expected.
Overall, almost a quarter of respondents (23%) said that ESG has become ‘more of a focus/more important’ as a result of the COVID-19 crisis. French respondents led the way, with 42% thinking that ESG has become more important; whereas the proportion in Germany was notably low at just 3%.
The importance of all three ESG factors has increased since the crisis began, most notably for social considerations, which 70% of respondents expect to become extremely or very important as we move forward. The importance of social criteria rose 20 percentage points from before the crisis, closing the gap on Environmental (up 11% to 74%) and Governance (up 4% to 76%) factors. Environmental and governance factors remain the most important ESG elements of investment approaches, although the increasing focus on social issues shows a major paradigm shift – with significant variation by region.
Frédéric Janbon, CEO of BNPP AM comments: “The Covid-19 crisis has clearly prompted a shift in investor perception of social factors, which are now widely seen as having a critical and positive impact on long-term value creation and risk mitigation. It has also highlighted the interconnection between the way in which companies approach social issues such as treatment of employees or addressing inequalities in their long-term sustainability strategy. At BNPP AM, we engage with the companies in which we invest with regard to social issues and all aspects of ESG. We encourage companies to evolve and improve their social behaviour, thereby reducing risk and enhancing the sustainable returns that we can deliver to our clients.“
Social considerations positively impact investment performance and risk management
The new study highlights a strong view that social considerations have a positive impact: 79% of respondents expect social issues to have a positive long-term impact on both investment performance and risk management. The short-term impact on investment performance appears less significant.
Intermediaries’ perceptions of the positive impact of social considerations is even greater than that of investors: 88% of respondents believe the ‘S’ criteria will have a greater impact on long-term performance versus 76% pre-crisis, and similarly 94% of respondents believe it will lead to better risk management compared to 74% per-crisis.
Respondents’ perspectives of social considerations are subject to multiple influences, primarily global events (38%), news & media (33%) and regulators and internal stakeholders (both 32%). They are less influenced by consultants, who rank low on the list.
Further analysis showed the relative importance of underlying social issues to investment processes. The most important elements were labour standards (38%), excluding harmful investments (31%), human capital management (23%) and gender equality (22%), with community involvement (11%) considered less important.
Lack of standard metrics coupled with data availability creates significant barriers to investing with consideration to social factors
Although 37% of respondents saw ‘no barriers’ to investing with consideration to social factors, two clear barriers emerged from the study: “lack of established/standard metrics” (42%) and “lack of clarity over what socially responsible investment includes” (31%).
This is consistent with another key finding – that a majority of respondents plan to significantly increase the use of social metrics. Almost half the respondents (47%) already use exclusionary metrics, with a further 26% planning to do so, while 33% already use labour standards metrics, with the same percentage expecting to incorporate them.
Jane Ambachtsheer, Global Head of Sustainability at BNPP AM, comments: “While social factors are an extremely important component of companies’ ESG scores, they have often been perceived as less prominent. This can be attributed in part to the fact that the nature of social indicators can seem less tangible or measurable, with standards that are more likely to vary by region – however, the same can hold for environmental and governance factors. We continue to put significant focus on accessing and utilising data and research on a range of ‘S’ indicators, including classic topics such as gender diversity and labour standards, as well as a deeper dive into other business practices that can support more inclusive growth.”
According to the survey findings, a wide range of market players plan to enhance their focus on social considerations in their ESG approach, a trend which reflects one of the three themes of BNPP AM’s Global Sustainability Strategy, that of equality and inclusive growth.
- Conducted on behalf of BNPP AM by Greenwich Associates. 96 institutional investors and 33 intermediary distributors in the UK, France, Germany, Italy, the Netherlands and Nordic countries were surveyed during June 2020.