There has been “a dramatic drop” in the number of institutional investors who are confident that responsible investment provides better financial returns.
Hermes Investment Management – a firm that puts a strong emphasis on environmental, social and governance (ESG) elements in its own strategies – found that fewer than half of the investors surveyed believed companies that focus on ESG produced better long-term returns.
This is a fall from 56% in Hermes’s annual Responsible Capitalism Survey last year, to 46% this year.
In spite of the fiduciary duty of pension funds to maximise retirement incomes for beneficiaries, 33% of respondents felt significant ESG risks with financial implications were not a reason to reject an otherwise attractive investment.
The findings, taken from a survey of 104 investors, also showed 86% believed fund managers should price in corporate governance risks as a core part of their investment analysis.
Saker Nusseibeh, chief executive of Hermes Investment Management, said many institutional investors still viewed ESG as a “tick-box exercise” to keep risk managers happy rather than “part and parcel of building a better future for retirees”.
Nusseibeh said: “The link between ESG considerations and financial value creation needs to be more clearly recognised. Companies that can adapt to social and environmental change are likely to deliver better long-term results for shareholders.”
As example, he said companies that harness big data to make industrial processes more efficient were in a better position than companies relying on “old and wasteful practices”.
He also said companies that treat their staff well have a more productive workforce.
He added: “I believe investors are looking at this in reverse and need to consider their role as long-term stewards of capital and in shaping society. Investment managers play a key part in holding companies to account.
“It is in their gift to shape a better future for retirees, and not by beating a benchmark, but by influencing the way companies behave.”
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