Matt Orsagh, CFA, CIPM, is a director of capital markets policy at CFA Institute, where he focuses on corporate governance issues.
A recent survey by CFA Institute of more than 1,500 portfolio managers and research analysts has found interest in environmental, social, and governance (ESG) metrics is maturing, though not consistently across the globe’s financial hubs. Why do practitioners undertake ESG analysis at all? Risk assessment and client demand are the dominant reasons, and the desire for more and improved ESG data remains strong.
In 2015, CFA Institute surveyed relevant members to better understand if they were integrating ESG data into the investment process. In the 2017 ESG survey, we find evidence of trends developing in the use of ESG factors, and measuring the growth in ESG integration. This should offer investors a better understanding of the evolving ESG landscape.
While the number of investment professionals taking account of ESG factors is the same (73 per cent at least consider environmental, social, or governance), the interest in each component has increased around the globe. These results could mean that interest in integration has plateaued, or that we are in a maturing phase in which adoption of ESG integration is just growing more slowly than before.
When asked to rate ESG issues from most impactful to least impactful, board accountability, human capital, and environmental degradation were ranked as top three issues that could have a significant impact on financial markets.
Asked to rate issues according to what they believe their impact would be, with 1 being no impact and 5 being a significant impact, it’s clear that finance professionals believe these issues are impactful. A majority rated each issue at 4 or 5.
Managing risk and client demand were cited as the reasons respondents take ESG integration into consideration in investment analysis.
With that in mind, it’s unsurprising that for those who do not integrate ESG into the investment process, lack of client demand was the main reason, followed by an increasing belief that ESG issues may not be important to investment gains.
An increase in client demand followed by a proven link between ESG and performance were most likely to sway those who do not currently incorporate ESG data in their investment process.
The most common use of ESG in the investment process is still ESG integration, by a wide margin. But there was a surprise uptick in exclusionary screening – excluding sectors or companies that don’t fit the sustainability goals – at the expense of best in class investing over the past two years.
Across regions, the same percentage of respondents agree that public companies should be required to report at least annually on a cohesive set of sustainability indicators. Over two-thirds of those surveyed (69 per cent) believed it is important that ESG Disclosures be subject to some level of independent verification – unchanged since 2015.
When asked if members take ESG issues into account in their investment analysis and decisions, those in the Americas are lagging. But a significantly higher proportion of members in the Asia-Pacific (APAC) region and Europe, Middle East, and Africa (EMEA) region do take ESG into account.
Survey respondents in EMEA were much more likely to consider ESG issues systematically in investment analysis (62 per cent) than Americas (47 per cent) or APAC (48 per cent).
Respondents in EMEA (43 per cent) indicated that employees in their firms are trained on how to consider ESG issues in analysis. These numbers were much lower in the Americas (28 per cent) and APAC (30 per cent).
Almost half of men surveyed (46 per cent) say ESG issues are immaterial or add no value to investment decisions, compared with 18 pe rcent of women – who are also much more likely to systematically consider ESG data. For both men and women, however, the common reason is consistent. Lack of client demand.
Though overall CFA Institute members are likely to take ESG issues into account, millennials are most likely consider the issues in their investment analysis and decisions, while baby boomers are least likely. As more baby boomers retire from the industry, it seems fair to assume that the overall interest in ESG will increase in the coming years.
It is clear that the integration of ESG into the investment process is not a passing fad, although increased demand from clients, more and better ESG data, and training from practitioners could enhance the ability of financial investors to incorporate ESG data into the investment process.
Why is this important? ESG-related disclosures can improve the transparency of the global capital markets through more thorough reporting of the long-term issues facing publicly traded companies.
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