Investors fail to see value of S and G factors of ESG, notes study

Sep 03, 2019
NN Investment says 86 percent say energy transition from fossil fuels to renewables has potential to drive investment returns

With ESG issues the central financial zeitgeist of the age, a new report reveals that investors focus less on social and governance investment themes than on environmental opportunities.

The new survey – Investor Sentiment: Responsible Investing – undertaken by Dutch asset manager NN Investment Partners, investigates which ESG factors investors believe to have the most potential to drive returns.

The results show that while two thirds (66 percent) of professional investors see the greatest potential in environmental factors when it comes to generating returns, governance (40 percent) and especially social factors (15 percent) lie far behind.

So are investors that fail to look beyond the E of ESG missing out on attractive investment opportunities? The results of the survey clearly illustrate how investors gravitate toward the E, with 87 percent saying that energy transition from traditional fossil fuels to renewables has considerable potential to drive investment returns, followed by climate change (81 percent) and pollution (78 percent).

But there are significant differences between countries: French investors’ scores reveal far more balanced views. Their score for E – 52 percent – is actually lower than for G (56 percent), while their S score (35 percent) is much higher than the average.

This in turn presents a big dilemma for IR professionals: should they focus on what investors find appealing, or present a company narrative in the broadest sense, ESG or otherwise?

Addressing this issue, Adrie Heinsbroek, principal for responsible investment at NN Investment Partners, tells IR Magazine: ‘It is important to emphasize that while investors’ perception is that the E-factor adds most to creating value, NN Investment Partners finds that all three factors have to be taken into account when it comes to investment analysis.

‘We believe it should go without saying that all three factors should be given equal attention. The perception of the investors in our research is not in line with reality, as value creation is based on all three axes of E, S and G. We should bring this to the forefront and put emphasis on the financially material ESG factors.’

Heinsbroek says it is interesting that opinions differ sharply from one country to another: ‘For example, Dutch professional investors focus so heavily on the environmental factor and so little on social aspects when it comes to return potential.

‘Currently environmental issues are high on the political and economic agenda as there is a clear correlation with returns, so it is not really surprising that investors tend to focus more on the E of ESG. Climate change, pollution and global warming are prominent issues and positive impact is, for example, more quantifiable and easier to report on in terms of reduced CO₂ emissions or waste.  

‘But from a portfolio diversification perspective, it is important to also look at social and governance factors as these criteria can also help pinpoint plenty of opportunities.’

Governance, for example, is a highly significant factor in corporate risk assessment and management quality had already formed a key pillar of risk analysis in the days before the responsible investing era.

In the period 2008-2019, NN Investment Partners analyzed 53 Asian corporate bond issuers that defaulted using information from a range of sources, including credit rating agency reports, news articles and analysts’ research.

The results show that 20 out of the 53 issuers (38 percent) had issues that were related to poor corporate governance, demonstrating the importance of not overlooking the governance factor in assessing the potential risk associated with potential investment opportunities.

Heinsbroek adds: ‘Our own analysis shows the range of companies that score well on ESG criteria globally is bigger and much more diverse than many might think. We believe investment in a wide range of sectors can also provide S and G benefits. There are many social impact themes linked to the UN Sustainable Development Goals.’

He notes, therefore, that the correct approach is for ‘strategies that already take governance factors into account and also have a strong social focus – in order to offer investors long-term, sustainable benefits and attractive risk-adjusted returns across a wider range of sectors.’

 

 

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