The asset management industry is turning ever more green through the launch of SRI funds, the introduction of ESG factors within portfolios or the compliance with global regulatory standards such as the UN principles for responsible investment.
But recent research conducted by RBC Global Asset Management has emphasised ESG factors are not yet considered as a stand-alone alpha driver.
The survey was distributed to 1,000 institutional asset owners, wealth managers and pension plan consultants.
Only 30% of respondents believe ESG factors are source of alpha while 37% say they are not and 33% are not sure they are, despite evidence is being built that ESG can deliver alpha.
As an example, in a 2015 study, MSCI found out that portfolios with an ESG bias outperformed a world stock index, made up of over 1,500 large-cap equities, over an eight-year period.
Also a majority of investors surveyed (52%) assess that negative screening tactics concern primarily specific mission-related investors, therefore do not apply to investors broadly.
Some 28% of respondents agree that negative screening impacts alpha, suggesting that for these investors, screening is more a philosophical decision than an alpha-driven one.
Another finding of the research shows ESG is not perceived as a risk mitigator by 40% of the 1,000 investors surveyed, perhaps reflecting the fact that investors remains unconvinced by anecdotal evidence, including the value depletion that has occurred at companies engulfed by high-profile scandals or environmental catastrophes according to RBC.
However 62% of respondents believe the fossil fuel free movement will last long as investment issue.
ESG-related information released by companies does not satisfy a majority of respondents as 43% of them answer they were somewhat or completely dissatisfied with those information.
Only 17% claimed they were partly or completely satisfied with the quality and quantity of ESG-related data from companies.
Also for 60% of investors interviewed, proxy voting on the execution of ESG strategy is the portfolio manager’s job rather than proxy advisory firms or asset owners.
Lastly, research and returns have emerged as the main blocks to increased focus on ESG by asset owners surveyed.
“It is striking to see that asset owners remain doubtful of ESG’s efficacy even as so much capital pours into ESG-related investments,” commented Ben Yeoh, senior portfolio manager at RBC Global Asset Management.
“Clearly, many investors have yet to understand the financial benefits of ESG. That gap, between the empirical data and perception in the marketplace, represents an opportunity that can be exploited with thorough, fundamental analysis of environmental, social and governance considerations.”
“Technology, competition and other factors have made traditional equity markets hyper-efficient, and that’s made alpha increasingly difficult to come by,” added Habib Subjally, senior portfolio manager and head of Global Equities at RBC Global Asset Management.
“But ESG remains an inefficient or at least immature market where, because ESG factors are not yet fully reflected in valuations, investors who understand how to identify and properly value those factors can still gain an advantage.”