Pandemic shifts investor perception of ESG and ‘social’ factor, finds new survey

Cultural change

Environmental, social, and governance (ESG) factors have grown more important since the onset of pandemic, with a new survey sponsored by BNP Paribas Asset Management showing the ‘social’ aspect coming into greater focus.

The study, conducted by Greenwich Associates, showed that 81 per cent of respondents already take ESG considerations into account in all or part of their portfolios, with a further 16 per cent planning to do so. The leading reasons were to positively impact society or the environment (80 per cent), reduce risk (58 per cent) and meet stakeholder needs (47 per cent).

Almost a quarter of respondents, 23 per cent, said that ESG has become ‘more of a focus/more important’ as a result of the Covid-19 crisis.  French respondents led the way, with 42 per cent thinking that ESG has become more important; whereas the proportion in Germany was notably low at just 3 per cent.

The ‘social’ considerations were deemed significant, with 70 per cent of respondents expecting it to become extremely or very important as we move forward. The importance of social criteria rose 20 percentage points from before the crisis, closing the gap on Environmental (up 11 per cent to 74 per cent) and Governance (up 4 per cent to 76 per cent) factors.  Environmental and governance factors remain the most important ESG elements of investment approaches, although the increasing focus on social issues shows a shift in thinking, with significant variation by region.

Frédéric Janbon, CEO of BNPP AM, comments: “The Covid-19 crisis has clearly prompted a shift in investor perception of social factors, which are now widely seen as having a critical and positive impact on long-term value creation and risk mitigation.  It has also highlighted the interconnection between the way in which companies approach social issues such as treatment of employees or addressing inequalities in their long-term sustainability strategy.” 

“At BNPP AM, we engage with the companies in which we invest with regard to social issues and all aspects of ESG.  We encourage companies to evolve and improve their social behaviour, thereby reducing risk and enhancing the sustainable returns that we can deliver to our clients.“

The new study also highlights a strong view that social considerations have a positive impact: 79 per cent of respondents expect social issues to have a positive long-term impact on both investment performance and risk management.  The short-term impact on investment performance appears less significant.

Intermediaries’ perceptions of the positive impact of social considerations is even greater than that of investors: 88 per cent of respondents believe the ‘S’ criteria will have a greater impact on long-term performance versus 76 per cent pre-crisis, and similarly 94 per cent of respondents believe it will lead to better risk management compared to 74 per cent per-crisis.

Respondents’ perspectives of social considerations are subject to multiple influences, primarily global events (38 per cent), news & media (33 per cent) and regulators and internal stakeholders (both 32 per cent). They are less influenced by consultants, who rank low on the list.

Further analysis showed the relative importance of underlying social issues to investment processes.  The most important elements were labour standards (38 per cent), excluding harmful investments (31 per cent), human capital management (23%) and gender equality (22 per cent), with community involvement (11 per cent) considered less important.

Although 37 per cent of respondents saw ‘no barriers’ to investing with consideration to social factors, two clear barriers emerged from the study: “lack of established/standard metrics” (42 per cent) and “lack of clarity over what socially responsible investment includes” (31 per cent).

This is consistent with another key finding - that a majority of respondents plan to significantly increase the use of social metrics.  Almost half the respondents (47 per cent) already use exclusionary metrics, with a further 26 per cent planning to do so, while 33 per cent already use labour standards metrics, with the same percentage expecting to incorporate them.

Jane Ambachtsheer, global head of Sustainability at BNPP AM, comments: “While social factors are an extremely important component of companies’ ESG scores, they have often been perceived as less prominent.  This can be attributed in part to the fact that the nature of social indicators can seem less tangible or measurable, with standards that are more likely to vary by region – however, the same can hold for environmental and governance factors.  

“We continue to put significant focus on accessing and utilising data and research on a range of ‘S’ indicators, including classic topics such as gender diversity and labour standards, as well as a deeper dive into other business practices that can support more inclusive growth.”