Responsible investing has been in practice for more than 30 years and has evolved considerably in its sophistication and range of approaches.
Responsible Investing: The Evolution of Ownership explores the conclusions drawn from RBC GAM's 2017 survey of institutional asset owners and investment consultants from the US, Europe and Canada on their attitudes towards responsible investing and ESG integration.
ESG is a global phenomenonA full 67% of global respondents use ESG principles as part of their investment approach. By region, more investors in Europe (85%) than in Canada (73%) and the US (49%) incorporate ESG analysis.
Mandates (or lack of them) are keyThe main reason (51%) given by institutional investors who do not incorporate ESG analysis is the lack of requirements to do so from their boards of directors. The other most commonly cited reasons are an unclear value proposition, and their strict preference for financial analysis. Interestingly, the inverse of these reasons was given by those who have adopted ESG - they do it for the clear value proposition, their preference for multiple analytical factors in the investment process, and to comply with a clear board-level mandate or investment guidelines.
ESG analysis as an investment toolThirty-two percent of global respondents said they do not consider the use of ESG factors to be a way to mitigate risk in their portfolios, while 20% are unsure. Forty-six percent do not consider ESG factors to be an alpha source and 30% are unsure. This uncertainty opens up an opportunity for investment managers who utilize ESG analysis as they compete to create value for their clients.
Poor information qualityFor institutional investors who employ ESG criteria, a majority across all regions of the survey are not satisfied with the disclosure of ESG metrics provided by corporations. US and Canadian investors prefer to allow shareholder proposals do the work of improving disclosure. European investors prefer that government regulators require it.
Gender diversityA large majority of institutional investors in every region polled said gender diversity on corporate boards is important to them - 71% in the US, 80% in Canada and 68% in Europe. As with disclosure of ESG metrics, European investors prefer that government regulators require gender diversity; investors in the US strongly prefer market forces to regulation; Canadian investors' preference is split between shareholder initiatives and market forces.
Changing Corporate BehaviourWithin the context of the Fossil Fuel Free movement, only 6% of global respondents said that divestment was more effective than engagement. In the US and Canada, engagement is viewed as more effective than divestment. One-third of Europeans agree, but the same number view divestment and engagement to be equally effective. On the topic of exclusions more broadly, 48% of European respondents view negative screens as applicable across investor types; less than a third of US and Canadian respondents agreed.
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RESPONSIBLE INVESTING DEFINED
ESG IntegrationInclusion of environmental, social and governance (ESG) factors as a component of fundamental analysis to identify potential sources of alpha or risk reduction.
Socially Responsible InvestingImpact Investing
Allocating funds to earn a financial return alongside measurable social and environmental impact
Using ESG measurements to select specific companies or sectors
Using ESG measurements to exclude specific companies or sectors
Building portfolios that only include investments that meet specific ESG criteria
EngagementSeeking to influence corporate behavior through direct engagement, shareholder proposals, and proxy voting.
* References to RBC GAM include one or more of the following: RBC Global Asset Management Inc. (including Phillips, Hager & North Investment Management), RBC Global Asset Management (U.S.) Inc., RBC Global Asset Management (UK) Limited and the asset management division of RBC Investment Management (Asia) Limited.