NN IP: Many professional investors fail to see the value of the S and G factors of ESG

NN IP: Many professional investors fail to see the value of the S and G factors of ESG

ESG
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By Adrie Heinsbroek, Principal Responsible Investment

Growing public awareness of climate change, resource scarcity, global population growth and social injustice has resulted in an increasing focus on integrating environmental, social and governance (ESG) considerations into investment processes. However, in practice, investors focus less on social and governance investment themes than on environmental opportunities. New survey (Investor Sentiment: Responsible Investing)[1] commissioned by NN Investment Partners (NN IP) investigated which ESG factors investors believe to have the most potential to drive returns. The results show that while 66% of professional investors see the most potential in environmental factors when it comes to generating returns, governance (40%) and especially social factors (15%) lie far behind. So are those investors who fail to look beyond the ‘E’ of ESG missing out on attractive investment opportunities?

The results of the survey clearly illustrate how professional investors gravitate towards the ‘E’: 87% say that energy transition from traditional fossil fuels to renewables has considerable potential to drive investment returns, fol-lowed by climate change (81%) and pollution (78%).

There were significant differences between countries too, however, with French investors’ scores revealing that they have far more balanced views. Their score for ‘E’ (52%) was actually lower than for ‘G’ (56%) and their ‘S’ score (35%) was at a much higher level than the average.

Adrie Heinsbroek, Principal Responsible Investment at NN Investment Partners, commented: “It is interesting to see that opinions differ so sharply from one country to another, for example that Dutch professional investors focus so heavily on the environmental factor and so little on social aspects when it comes to return potential.”

“Currently environmental issues are high on the political and economic agenda as there is a clear correlation with returns, so it is not necessarily surprising that investors tend to focus more on the ‘E’ of ‘ESG’. Climate change, pollu-tion and global warming are prominent issues and positive impact is, for example, in terms of reduced CO₂ emissions or waste, more quantifiable and easier to report on. But from a portfolio diversification perspective, it is important to also look at social and governance factors as these criteria can also help pinpoint plenty of opportunities.”

Governance is, for example, a highly significant factor in corporate risk assessment and management quality already formed a key pillar of risk analysis in the days before the responsible investing era. This is perhaps also why this element scored significantly higher than the other governance factors in this survey (74%). In the period 2008-2019, NN IP analysed 53 Asian corporate bond issuers that defaulted using information from a range of sources, including credit rating agency reports, news articles and analysts research. The results showed that 20 out of the 53 issuers (38%) had issues that were related to poor corporate governance, demonstrating the importance of not overlooking the governance factor in assessing the potential risk associated with potential investment opportunities.

Adrie Heinsbroek added “Our own analysis[2] also shows that the range of companies that score well on ESG criteria globally is bigger and much more diverse than many might think. We believe that investment in a wide range of sectors can also provide ‘S’ and ‘G’ benefits. There are many social impact themes linked to the UN Sustainable De-velopment Goals (SDGs). For example, SDG-linked investment opportunities include hospitals and care homes (SDG 3 - good health and well-being); water and waste and water treatment plants (SDG 6 - clean water and sanitisation); and schools and universities (SDG 4 - quality education). So in addition to incorporating environmental factors, the NN IP approach is to offer strategies that already take governance factors into account and also have a strong social focus – to offer investors long-term, sustainable benefits and attractive risk-adjusted returns across a wider range of sectors.”

[1] Source: NN Investment Partners’ Investor Sentiment: Responsible Investing survey, May 2019. 290 professional investor respondents. Respondents were drawn from five main areas: France, Germany, the Netherlands, Italy and Belgium, with a further panel of respondents collected from the UK and Scandinavia.

[2] Source: Based on analysis of 15,000 companies in the CS Holt database of listed stocks. Almost 3,000 stocks meet positive impact criteria.