ESG will be industry standard within five years, say institutional investors

Green trees from above

Over two thirds of institutional investors (70 per cent) expect investing in line with environment, social, and governance factors (ESG) to become standard practice across the industry within the next five years, according to a recent survey by Natixis Investment Managers.

Indeed, almost all (96 per cent) believe institutional investors have an important role to play in addressing the world’s most pressing challenges.

Natixis surveyed 500 institutional investors across the globe, including managers of corporate and public pension funds, foundations, endowments, insurance funds and sovereign wealth funds. It found that 48 per cent of investors said that institutions should put capital to work to address issues such as climate change, social and economic inequality, and infrastructure development, and 49 per cent would use their clout to influence the policies and actions of companies in which they invest.

While their main reason for integrating ESG was to align their portfolios with their firm’s values, two-thirds (65 per cent) believe ESG analysis also has a valid place alongside fundamental analysis, and more than half (54 per cent) say there’s alpha to be found in ESG. 

Despite their expectation of ESG’s growing importance, six in ten said they would be more willing to invest in projects that help provide solutions to societal challenges if those projects presented a risk/return profile in line with their portfolios’ long- term goals. 

Balancing short-term risks and long-term objectives is continuing to pose a conundrum for institutions, since the strict liquidity requirements imposed after the 2008 Financial Crisis have limited their investment options, while the recent ultra-low interest rates have pushed their future obligations higher. 

The Federal Reserve’s actions to stabilise the financial markets in March after the Covid-19 pandemic was declared a national emergency reduced rates nearly to zero, which further exacerbated the problem. 

The survey, which was compiled before the onset of the pandemic, found that six out of ten (57 per cent) institutional investors say that solvency and liquidity requirements create a bias for short-time horizons and highly liquid assets, and 48 per cent say that these short-term performance expectations inhibit their ability to execute long-term strategy. Meanwhile, 31 per cent also report internal pressure from their own boards’ focus on quarterly results. 

“Institutional investors must now find ways to meet their mandates in a world that’s even more yield- starved while facing unprecedented social, political, financial and environmental threats,” says David Giunta, CEO for the US at Natixis Investment Managers. “We’re seeing institutions draw on a wider variety of assets and resources now more than ever to achieve their long-term objectives.” 

Regardless of the risks, Natixis found a trend toward private investments among institutional investors. 

Nearly seven in ten (68 per cent) institutional investors say private assets will play a more prominent role in their investment strategies going forward, with 71 per cent believing the returns of private assets make them worth the liquidity risk. 

“Impact investing has vast promise and the possibility for win-win arrangements on a massive scale, but these types of initiatives often present risks that are prohibitive for institutional investors,” says Dave Goodsell, executive director of Natixis’ centre for Investor Insight. “Platforms such as blended finance have the potential to make investing in socially beneficial projects more realistic for institutional teams, and free up capital to improve living conditions around the globe.”