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Nov 15, 2017

US lags behind Europe and Canada on ESG integration

Concerns about ‘financial trade-off’ may deter institutional investors from integrating ESG principles into investment decisions, note reports

While a selection of institutional investors put their money where their mouth is this proxy season, US investors still lag behind their counterparts in Europe and Canada on integrating ESG into their strategy, according to new research.  

Between January and July 30, there were several proxy voting landmarks, with State Street voting against the election of directors at 400 companies without female board representation, and Blackrock, Vanguard and Fidelity voting in favor of shareholder proposals related to climate change – ultimately leading to ExxonMobil, Occidental and PPL Corporation being defeated at the ballot.

But only half (49 percent) of US institutions surveyed by RBC Global Asset Management use ESG principles as part of their investment approach, compared with 85 percent of institutions in Europe and 73 percent in Canada.

US investors are less likely than their European and Canadian counterparts to think of ESG analysis as a risk-mitigator or a source of alpha, according to the survey of 434 institutional asset owners and investment consultants.

‘These answers suggest a really fundamental misunderstanding about ESG integration,’ Judy Cotte, head of responsible investing and corporate governance at RBC Global Asset Management, tells IR Magazine. ‘ESG integration is about ensuring you’re factoring material ESG factors that may have an impact on performance into your investment process.’

One in four US institutions (25 percent) plan to increase their allocation to portfolio managers that have added ESG into their decision-making process, while 49 percent of European institutions and 15 percent of Canadian institutions intend to do the same.


Creating better ESG disclosures

In the US, Europe and Canada, around 60 percent of the investors that that ESG criteria into consideration are not satisfied with the level of reporting by issuers. But respondents disagree about who should be influencing companies to provide better information: US and Canadian respondents say shareholders should take the lead in influencing companies, while European investors feel it’s the role of government regulators.

Cotte says she is sympathetic to issuers that aren’t sure which ESG reporting framework – such as those from the Sustainability Accounting Standards Board, the Global Reporting Initiative or the International Integrated Reporting Council – to use. She recommends focusing on what is material and including it in existing financial filings.

‘Even if you want to include it in your corporate sustainability report, you should be discussing it in materiality terms, rather than having a document be a glossy marketing tool,’ she adds.


Is ESG engagement actually decreasing?

According to a separate survey, many institutional investors still see ESG investing as a good-conscience trade-off at the expense of long-term returns. Less than half (48 percent) of the 104 institutional investors surveyed by Hermes Investment Management believe companies that focus on ESG issues produce better long-term returns. This marks an 8 percentage-point drop from last year’s results.

‘The link between ESG considerations and financial value creation needs to be more clearly recognized,’ writes Saker Nusseibeh, chief executive of Hermes Investment Management, in the report. ‘Companies that can adapt to social and environmental change are likely to deliver better long-term results for shareholders.’

Ben Ashwell

Ben Ashwell was the editor at IR Magazine and Corporate Secretary , covering investor relations, governance, risk and compliance. Prior to this, he was the founder and editor of Executive Talent , the global quarterly magazine from the Association of...