Why and How Investors use ESG Information

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
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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.