Why and How Investors Use ESG Information: Evidence from a Global Survey

  • Amir Amel-Zadeh and George Serafeim
  • Financial Analysts Journal
  • A version of this paper can be found here
  • Want to read our summaries of academic finance papers? Check out our Academic Research Insight category

What are the research questions?

  1. Is the primary motive for using ESG data the belief that using such data is an ethical responsibility?
  2. Is there a primary barrier to investors using ESG data?
  3. Do investors really believe that using ESG will impact returns?
  4. How will investors use ESG data in the future?

What are the Academic Insights?

  1. NO.  The primary motive for over 60% of respondents to the survey is the belief that using ESG data provides alpha, or “information that is financially material to investment performance.”   The second motivator (~33%) was the belief that using ESG data reflects growing client/stakeholder demand.  Tied for second (~33%), was the idea that investor influence can cause firms to embrace ESG practices and goals.
  2. YES.  There was a core data issue that emerged from the survey: a lack of access and availability of standardized data that is comparable across corporations.
  3. YES.  Investors perceive that integration of ESG practices into stock valuation (~61%) and active engagement with the firm (~53%) impact returns the most, and the fewest expect negative screening (~39%) to have the least impact.
  4. Increasing proportions of ESG investors are expected to use positive screens (~33%) and active ownership roles (~33%) in the future.  Risk premium investing (~23%) and overlays or portfolio tilts (~12%) are expected to be used by the fewest respondents.

Why does it matter?

The result that the respondents appeared to be motivated by financial motivations and not ethical motivations is likely due to the “mainstream” quality of institutional investors who were surveyed. Not a surprising result. However, the authors suggest that the preferred ESG investment style does vary depending on whether the respondent was motivated ethically or financially. Perhaps this explains the lack of empirical support in the literature for the idea that there is little to no difference between ESG portfolios and the typical mutual fund.
One of the strengths of this paper is the discussion presented in the “conclusions” section.  A number of issues were highlighted and focused on topics for future research emanating from the results of this survey.  Any easy read and worth the time for that reason.

The most important chart from the paper

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged and do not reflect management or trading fees, and one cannot invest directly in an index.


Abstract

Using survey data from mainstream investment organizations, we provide insights into why and how investors use reported environmental, social, and governance (ESG) information. Relevance to investment performance is the most frequent motivation, followed by client demand, product strategy, and then, ethical considerations. An important impediment to the use of ESG information is the lack of reporting standards. Among the various ESG investment styles, negative screening is perceived to be the least beneficial to investments and is driven by product and ethical considerations. Full integration and engagement are considered more beneficial and are driven by relevance to investment performance.

About the Author: Tommi Johnsen, PhD

Tommi Johnsen, PhD
Tommi Johnsen is the former Director of the Reiman School of Finance and an Emeritus Professor at the Daniels College of Business at the University of Denver. She has worked extensively as a research consultant and investment advisor for institutional investors and wealth managers in quantitative methods and portfolio construction. She taught at the graduate and undergraduate levels and published research in several areas including: capital markets, portfolio management and performance analysis, financial applications of econometrics and the analysis of equity securities. In 2019, Dr. Johnsen published “Smarter Investing” with Palgrave/Macmillan, a top 10 in business book sales for the publisher.  She received her Ph.D. from the University of Colorado at Boulder, with a major field of study in Investments and a minor in Econometrics.  Currently, Dr. Johnsen is a consultant to wealthy families/individuals, asset managers, and wealth managers.

Important Disclosures

For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Third party information may become outdated or otherwise superseded without notice.  Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency has approved, determined the accuracy, or confirmed the adequacy of this article.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. Our full disclosures are available here. Definitions of common statistics used in our analysis are available here (towards the bottom).

Join thousands of other readers and subscribe to our blog.