Environment, social and governance investing is still regarded as a tick-box exercise to keep risk managers happy, according to a study into perceptions of ESG investment
Corporate investors still believe that an environment, social and governance (ESG) investment strategy involves “investor sacrifice” in a trade off against short-term profits, according to a study from Hermes Investment Management.
ESG is still regarded as a box-ticking exercise “to keep risk managers happy”, said Hermes’ annual Responsible Capitalism survey, this year entitled “Responsible Investing & the Persistent Myth of Investor Sacrifice”.
The past decade has seen the ESG investment ethos expand from a small investment niche, which was “the preserve of charities or religious groups”, the study explained.
“Today, they are widely discussed, but the debate remains narrowly drawn,” the report continued.
Only 48% of the 104 large institutional investors surveyed said they believed companies focused on ESG issues are producing better long-term returns.
The figure represents a drop in ESG confidence from 56% in the 2016 survey.
Some 86% of investors said fund managers should price in corporate governance risks as a core part of their investment analysis.
The Hermes reported suggested that many were clinging to a “persistent myth” that to meet ESG criteria something must be sacrificed.
Focusing on the idea of a perceived trade-off, the report quoted a 1999 speech by Kofi Annan.
“We have to choose between a global market driven only by considerations of short-term profit and one with a human face,” the former United Nations secretary general said in a speech given to the World Economic Forum in Davos that year.
The study warned: “Investors pay attention to ESG issues, but more often it is for risk management purposes, checking companies are meeting regulatory risks or avoiding costly environmental problems and litigation.
“In other words, it is all stick and no carrot. The ‘carrot’ of ESG is often neglected,” the report continued.
The survey focused particularly on pensions funds. Some 33% of respondents said they did not believe “significant ESG risks with financial implications” justified rejecting an otherwise attractive investment within the portfolio.
Saker Nusseibeh, chief executive of Hermes Investment Management, said: “It’s clear from this year’s Responsible Capitalism survey many institutional investors still view ESG as a tick-box exercise to keep risk managers happy rather than part and parcel of building a better future for retirees.
“The link between ESG considerations and financial value creation needs to be more clearly recognised. Companies that can adapt to social and environmental change are likely to deliver better long-term results for shareholders,” continued Nusseibeh.
“For example, a company that harnesses big data to make industrial processes more efficient is in a better position than one relying on old and wasteful practices and companies that treat their staff well have a more productive workforce,” added the CEO of the $30bn investment manager.
The Hermes report cited US President Donald Trump (pictured) in his decision in June 2017 to walk away from the Paris Climate Change Agreement, saying it would ‘hurt the American economy and society alike’.
“Trump believed that forcing American companies to meet emissions targets would damage their competitiveness. To our mind, this highlighted a persistent myth around environmental, social and governance considerations – that they are somehow ‘bad for business’,” said the study.
“Good environmental and social practice by companies is good capitalism, but in spite of increasing awareness of its importance, this message is failing to resonate,” Hermes warned.