ESG integration improving returns, finds SSGA study

Apr 28th, 2017 | By | Category: ETF and Index News

According to a global study conducted by State Street Global Advisors (SSGA), the asset manager behind the SPDR range of ETFs, 68% of 475 institutions surveyed reported that the integration of an environmental, social and governance (ESG) strategy had significantly improved returns. ESG-based strategies have underscored one of the most significant trends in ETF product development in recent years.

ESG integration improving returns, finds SSGA study

The SSGA study found that 84% of respondents were satisfied or very satisfied with the financial performance of their ESG strategy.

The survey also found that 77% of respondents said they invested in ESG strategies because such factors play a role in a public company’s broader financial performance.

“There’s a collective shift in the institutional investment world right now that has asset owners and managers thinking differently about the full implications of their investments,” said Chris McKnett, head of global ESG business at SSGA. “For the majority, the question is no longer, ‘should we consider ESG as part of our mandate,’ the question is ‘how are we actively pursuing opportunities with our investments that help us reach our financial goals, while encouraging change in the process?’”

Research suggests that incorporating ESG strategies into the investment decision making process helps to boost long term sustainable returns by avoiding the operational risks associated with poor ESG companies. These risks include explicit costs such as litigation as well as implicit costs including reputational damage.

Additionally, a large majority of respondents (69%) said that pursuing an ESG strategy has helped with managing volatility. In total, 84% of respondents stated they were satisfied or very satisfied with the financial performance of their ESG strategy.

“In the last four or five years, we’ve seen a marked increase in the level of awareness and interest in ESG at the institutional level, which is extraordinarily promising,” said Rakhi Kumar, head of ESG investments and asset stewardship at SSGA. “There’s a broader appreciation of the notion that good governance translates into better management of areas such as a company’s carbon footprint, as well as how management engages with the workforce. The companies that operate this way, we believe, are better quality investments that yield better performance long term.”

The report did unearth concerns and challenges facing investors who are incorporating an ESG approach. Nearly half (49%) of asset owners noted that fees and expenses were the main barriers to further incorporating ESG into their portfolios, followed by a lack of internal knowledge on the matter. Both factors are suggestive of low-cost investment vehicles with transparent rules-based methodologies, such as ETFs, playing a larger role in facilitating greater investor adoption of ESG principles.

When comparing ESG appetites by region, the study found that 40% of investors in Europe and 38% of investors in the US have between 25–49% of their investments within ESG allocations. In Asia-Pacific, half of investors have less than 25% of investments within ESG allocations

Despite many surveyed investors expressing satisfaction with the performance benefits of their ESG strategies, overall ESG exposure remained low — on average only a third of adopters’ investments incorporate ESG criteria. According to SSGA, the results suggest that investors expect that proportion to grow over the next two years — to around 40% of their portfolio.

European investors considering ESG-based ETFs have a number of products available to them. Perhaps the leader in the European market is UBS, which offers a range of equity and fixed income funds based on MSCI indices such as the UBS MSCI Socially Responsible ETFs, which invest in equities across a range of regions, and the UBS Barclays MSCI US Liquid Corporates Sustainable UCITS ETF (LON: UC98), which invests in the bonds of firms deemed ethical.

There is also the Amundi ETF MSCI World Low Carbon UCITS ETF (LWCR), which excludes companies with the highest carbon emissions intensity and the largest owners of carbon reserves, and the iShares Dow Jones Europe Sustainability Screened UCITS ETF (LON: IESE) and iShares Dow Jones Global Sustainability Screened UCITS ETF (LON: IGSG), from ETF giant iShares, which target investment in companies which are leading in the sustainability field.

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