Most Investors Now Believe ESG Has a Positive Impact on Returns

The environmental, social and governance value proposition has become mainstream in developed markets and is accepted by managers and investors alike, according to Preqin. More significantly, it finds that a majority of investors and fund managers surveyed for its report, Future of Alternatives 2025, believe ESG policies have a positive impact on returns, with 83% of fund managers expecting ESG to be more important by 2025.

“Driven by regulations and investor demand, ESG investing has gone from being a niche market to the mainstream and has reached critical mass as of late 2020,” says Dave Lowery, Preqin head of research insights. “Industry professionals already see the relationship between positive impact and investment performance.”

Only 20% of fund managers surveyed believe ESG policies have a negative impact on returns.

A Problem with Disclosure

However, investors have concerns about ESG even as they embrace the model, namely inconsistent reporting and insufficient detail, expressed by 73% and 66% of investors respectively, according to Preqin. US SIF Foundation’s 2020 “Report on US Sustainable and Impact Investing Trends” also gives a nod to this issue.

“Amidst the rapid growth and profile that sustainable investing has garnered in recent years, we continue to see a significant increase in ESG assets for which limited information is disclosed,” says the report. “As an organization that supports accountability, transparency and the use of best practice in our field, we hope that there will be greater disclosure by asset managers of the specific ESG criteria they use.”

Technology may be a partial solution to the disclosure issue, according to Preqin. It says that most investors expect digital advances to significantly improve investors’ reporting and fund operations and, although 59% of fund managers are currently not using big data, 42% expect to use it more during the next five years.

In addition, ESG standards are likely to become more consistent and transparent under the newly announced merger between the International Integrated Reporting Council and the Sustainability Accounting Standards Board. The unified organization, the Value Reporting Foundation, will provide investors and corporations with a comprehensive corporate reporting framework across the full range of enterprise value drivers and standards to drive global sustainability performance.

“Information is the lifeblood of good decision making. Capital markets are hungry for information linked to enterprise value creation, but they cannot easily digest what comes from a fragmented reporting landscape,” says Robert K. Steel, chair, SASB Foundation board of directors. “This merger is an important step towards businesses and investors communicating with clarity and ease about the issues that matter most to financial performance.”

US SIF Foundation’s report also finds strong interest in ESG assets. Specifically, sustainable investing assets now total $17.1 trillion, a 42% increase from 2018. This represents 33% of the $51.4 trillion in total US assets under professional management.

Of particular interest to commercial real estate, it found that environmental criteria as a whole grew faster than social or governance factors during the past two years, increasing 57% from $10.1 trillion to nearly $16 trillion.

Climate change remains the most important specific ESG issue considered by money managers in asset weighted terms. The assets to which this criterion applies increased 39% from 2018 to 2020 to $4.2 trillion.

Moreover, risk management, resiliency, transparency and social engagement are ever-growing important issues during the pandemic. This has resulted in ESG practices becoming even more critical to real estate investment, according to a report from The Counselors of Real Estate.

The report, 2020-21 Top 10 Issues Affecting Real Estate, attributes the rise in ESG practices to a growing influence of Millennial investors, innovations in the measurement and tracking of ESG performance, and the wider acceptance of the risks of climate change, among other reasons.