Introduction

Sustainable investing has grown rapidly since the UN Principles for Responsible Investment launched in 2006. This study surveys 509 active equity portfolio managers globally, including 290 from traditional funds and 219 from sustainable funds, to explore their beliefs, objectives, constraints, and actions regarding firms’ environmental and social (ES) performance. Unlike prior surveys, the focus is exclusively on portfolio managers, not analysts or sustainability specialists.

Beliefs

ES performance is ranked lowest of six drivers of long-term firm value, with 73% of investors placing it fifth or sixth. Governance, culture, and strategy are seen as more material. However, 85% rated at least one ES factor as financially material, especially employee well-being and consumer health. Environmental issues such as greenhouse gas emissions were considered material by over half of respondents, though diversity was viewed as least material.

Beliefs about financial returns are mixed. A majority (57%) expect good ES performers to outperform, including 45% of traditional investors, while 64% expect poor ES performers to underperform. Many view ES as a “hygiene” factor, with poor performance posing greater downside risk than good performance provides upside. The most common rationale for ES outperformance is its correlation with other indicators of strong management.

Most investors believe firms generally invest optimally in ES. Yet 68% think companies overinvest in at least one area (often greenhouse gas emissions), while 51% see underinvestment in others (most often ecological impacts). Overinvestment is attributed to public, media, or investor pressure, while underinvestment is linked to short-termism by companies and investors.

Objectives and constraints

Only 27% of investors are willing to tolerate even minor sacrifices in shareholder returns for ES performance, and just 5% would accept a trade-off of 50 basis points or more. Fiduciary duty is cited as the main reason for prioritising financial returns, even among sustainable managers. Around 40% argue that no sacrifice is necessary as good ES projects can also enhance returns.

Constraints strongly shape decisions. 72% of managers have adjusted investment behaviour due to ES-related constraints, including 62% of traditional fund managers. These constraints stem from fund mandates, firmwide policies, client values, or reputational concerns. Common outcomes include avoiding stocks that might otherwise improve returns or diversification, and being prevented from engaging with ES laggards. For 30–55% of investors, such constraints reduced financial returns, highlighting the trade-offs imposed by external pressures.

Actions

ES factors influence stock selection, voting, and engagement. In stock selection, 77% of managers incorporate ES performance, though motivations differ. Sustainable managers cite mandates and client values, while traditional managers prioritise financial reasons such as avoiding downside risk. Beliefs in ES alpha are strongly correlated with integration. ES impact motivations, such as altering cost of capital, are less influential.

Voting patterns reflect fiduciary responsibility. Only 27% have supported shareholder proposals that are even slightly negative for firm value, though 78% supported value-neutral proposals. Support is often driven by constraints rather than expected societal impact.

Engagement is common, with 76% of all investors and 64% of traditional investors having engaged with firms on ES issues. The main driver is expected improvement in shareholder value, followed by issue salience for clients or the firm. Barriers to engagement include small stakes and high costs.

Conclusion

The study finds that financial returns remain the dominant objective for both traditional and sustainable managers, with limited willingness to sacrifice performance for ES goals. ES constraints play a central role in shaping actions, often at the expense of returns or effective ES impact. Beliefs and constraints, rather than fund labels, explain much of the variation in practices.

The report highlights that differences between traditional and sustainable investors are smaller than often assumed, and that asset owners should consider managers’ beliefs and constraints when selecting funds. Greater transparency around objectives, constraints, and beliefs—rather than labels—may help clients align investments with their goals.