Sustainable investing: Evidence from the field
This report surveys 509 equity portfolio managers on how they integrate environmental and social (ES) factors into investment decisions. Over 75% of respondents, including traditional investors, use ES factors, driven primarily by financial motivations. Constraints such as fund mandates influence these decisions, but most managers avoid sacrificing financial returns for ES performance.
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OVERVIEW
This report examines the incorporation of environmental and social (ES) performance into investment decisions by surveying 509 equity portfolio managers from traditional and sustainable funds. Key findings reveal that ES performance plays a significant role in stock selection, engagement, and voting decisions, with financial motivations being the primary driver for the majority of respondents.
Beliefs
The survey asked respondents to rank the importance of ES performance relative to other value drivers, such as strategy, corporate culture, and governance. ES performance ranked lowest, with 73% of respondents placing it fifth or sixth in importance. Despite this, 85% of respondents, including 78% of traditional investors, rated at least one ES issue as financially material. Employee well-being and consumer welfare were identified as the most important, while demographic diversity was rated the least material. Interestingly, 73% of sustainable investors expect strong ES performers to deliver positive returns, and 45% of traditional investors agree.
Objectives and constraints
Only 27% of investors indicated they would tolerate sacrificing financial returns for ES performance, with most citing fiduciary duty as the reason for prioritising returns. However, 71% of respondents reported that ES-related constraints, such as fund mandates or client wishes, influenced their stock selection, voting, or engagement decisions. These constraints sometimes led investors to avoid stocks that could improve returns or diversification, with 30-55% of investors reporting reduced financial returns due to these limitations. Moreover, 33% of sustainable investors noted that these constraints prevented them from engaging with underperforming ES companies that could have improved their ES performance.
Actions
When asked about the impact of ES performance on their investment actions, 77% of investors (66% traditional, 91% sustainable) stated that they often incorporated ES factors into stock selection. Financial reasons, such as improving returns or avoiding downside risk, were the main motivators for both types of funds. However, sustainable funds were also influenced by mandates and client values. For voting, only 27% of investors supported proposals that negatively affected shareholder value, and engagement with companies to improve ES performance was primarily driven by the potential to increase firm value.
Specific ES issues
The report examined investors’ views on two key ES issues: carbon emissions and board diversity. Neither issue was deemed highly important for financial returns, though reducing downside risk and complying with mandates were more significant factors for considering them. Investors expressed concerns that focusing on visible ES metrics, such as emissions, often detracts from more meaningful but less measurable factors like corporate culture.
Conclusions
The report concludes that the asset management industry is unlikely to drive major improvements in firms’ ES performance unless such improvements also contribute to financial returns. The belief that firms are investing in ES optimally further limits the potential for widespread change. Moreover, differences between traditional and sustainable investors are smaller than commonly assumed, with both groups placing high importance on financial returns and incorporating ES factors primarily for financial reasons rather than ethical concerns.