The number of institutional investors implementing ESG criteria has risen by almost 20% in two years, and almost 9 in 10 fund selectors want to maintain or expand their ESG offering. This could easily turn into a bubble, Natixis Investment Managers has warned.
The firm commissioned a study on ESG investing, called ‘Everyone’s on the bandwagon’, which is based on a series of global surveys of 500 institutional investors, 400 professional fund selectors and 2,700 financial advisors. The researchers argue that 2020 has been a watershed year for the investment form. In the last quarter of this year, a staggering $152 billion flowed into ESG strategies, bringing exposure to such products to $1,600 billion.
‘The rapid, global adoption of ESG has raised questions about whether the momentum built around ESG will continue or whether it is moving towards a bubble,’ said Harald Walkate. According to Natixis IM’s head of ESG, the answer lies in greater clarity on what clients ultimately want to achieve. ‘Not only to deploy ESG strategies that align with their values, but also to set realistic expectations for both financial performance and social impact.’
Personal values
Following earlier research among individual investors, Natixis had indeed concluded that three-quarters of them consider it important to align their investments and values.
Now the fund house says, supported by its new research, that it is not always clear to advisers what clients mean by ‘investments that align with their personal values’. Moreover, it is often unclear whether a client wants to achieve a better world with his ESG investments or a better financial return. According to the asset manager, more concrete evidence of financial and non-financial results is needed.
This may be the reason for the variation in approaches of professional investors. Most professional investors choose to integrate ESG factors into their general investment process, but there are also many investors who use negative screening and/or active ownership.
Future
The survey also shows that almost 70% of professional fund investors plan to further expand their ESG offering, mainly due to increased demand from investors. Analysts estimate that this is mainly due to increased social awareness and the fact that ESG investing has reached a critical mass among mainstream investors. Currently, some 42% of fund selectors and 34% of institutional investors engage in impact investing.
Almost six in ten financial advisers expect ESG investing to become an industry standard in five years’ time. The fact that they think it pays off is reflected in the survey result that 70% of fund selectors and over 60% of institutional investors think they can achieve alpha by integrating ESG factors into their investment process.