Stark differences in approach to ESG issues between Europe and North America show significant cultural markers, James Phillips writes.
Ethical and responsible investment is a much sought-after characteristic for managers of pension fund investments, and this view appears to be strongly shared across Europe.
The continent's institutional investors are leading the way compared to their counterparts in the US and Canada. At least, these are the conclusions in RBC Global Asset Management's annual survey, Responsible Investing: The Evolution of Ownership.
The asset manager asked 434 institutional investors across Europe, the US and Canada for their views on environmnental, social and governance (ESG) investing, relating to its importance and benefits, and their allocation.
The survey found some somewhat stark differences between Europe and North America, with Europe distinctly more favourable towards ESG issues.
Indeed, European investors were the most likely to consider ESG investing as a risk mitigator, with a net agreement rate of 66.4%, although 54.1% net of their Canadian counterparts were also agreeable. The US on the other hand held a net rating of -22.1% of this belief.
A similar story played out when the same investors were asked about the likely performance of ESG strategies compared to non-ESG strategies. European and Canadians were more likely to say they would perform better, with 40.4% and 24% apiece saying this. Conversely, just 4.9% of Americans held the same view.
Yet when asked if they considered ESG strategies as an alpha source, just European investors held a positive rating, with 23.4% net agreement. Yet for Canadian and American investors, this fell to -16.0% and -42.7% respectively.
Altogether, this leads to the result that half of European institutional investors intended to up their allocation to ESG strategies next year, while 15% of Canadians and 25% Americans said the same.
These views are somewhat shared by the National Employment Savings Trust (Nest). Its head of responsible investment Diandra Soobiah points to the master trust's partnership with UBS to reduce climate change risk in the default fund.
In this, more investment is made towards companies good on climate change action, while investment is reduced, but not completely divested, from poorly performing companies.
"This currently makes up 20% of the equities in the growth phase of our default fund and 30% in the foundation phase, where our youngest members are invested," Soobiah explains.
"Addressing ESG issues directly into our asset allocation in this way is something we're looking to develop further but as long-term investors we believe ESG factors should be incorporated as an integral part of the overall investment management process. That means we consider ESG factors where relevant across our portfolio, rather than seeing ESG strategies as separate."
Engage or divest
These feelings inform beliefs around influencing change in companies - a somewhat contentious subject.
Some state that it is best to keep your seat at the table rather than hand off to another buyer who does not care about these issues. Others argue that continuing shareholding is tacit acceptance.
For this reason it is unsurprising that while a high number of institutional investors said engagement is the best approach, others argued neither method was better than the other.
Nest's approach focuses on active engagement, Soobiah states.
"In principle, if the objective is to effect change, we don't believe divestment is the right approach. Holding shares in a company means you have a seat at the table and a say in how it's run.
"In a lot of cases selling out just passes the problems along to other investors, who may not be as concerned."
On fossil fuels, this belief was shared somewhat across the three regions, with 38% of Europeans, 51% of Canadians and 42% of Americans preferring engagement.
Canadians had the least faith in either strategy, with 27% stating neither engagement nor divestment was effective, while 34% of Europeans said they were equally effective.
Milne states the findings show a divergence in culture across the regions: "If you look at fossil fuel divestment, there's been a greater willingness in Europe to take the step, while there has been greater reluctance definitely in the US and to some degree in Canada as well."
Yet he is not sure if this translates across pension funds.
"When a client wants to divest from a particular risk or practice, what is driving that decision is the nature of the client," he continues. "For more organisations, especially like endowments or not-for-profits, that range of issues they're uncomfortable owning in their portfolio is getting bigger, and the comfort with divesting from those companies, because you are seeing other investors taking that approach.
"But if you're a traditional pension plan, that divestment decision is much harder because you are a fiduciary."
The responsibility for these issues could come down to the shareholders, market forces or government intervention.
For European investors, there has been a backdrop of regulatory necessities introduced over the last few years. In the UK, The Pensions Regulator and the Department for Work and Pensions have introduced a number of requirements for trustees on ESG issues.
Nest's Soobiah backs this work: "We're not opposed to regulation where it's needed. We take the approach that working collaboratively with industry, regulators and legislators is likely to have the biggest long-term impact."
It is therefore unsurprising that RBC's survey finds 43% of European investors are strongly in favour of government regulation enforcing better ESG-related disclosure, and boosting diversity on company boards.
Conversely, the US and Canada are averse to such paternalism, with 41% and 34% respectively preferring to let the shareowners do the work.
Milne states this is related to an evolutionary process, and others will soon follow.
"On subjects like diversity, in North America it's always been a 'try to let the market take care of themselves before you regulate' attitude," he states.
"In Canada we've been seeing the number of women only going up very slowly. For some investors, especially in Canada, we're looking to the regulators now to say 'enough is enough; we need to move forward on this'. It's worked in Europe, maybe it's time for us."
European investors are certainly making greater strides to boost their allocations to ESG strategies, and more likely to be positive about this approach.
Yet North America needs convincing, and while investment clients are uninterested themselves, this has a knock-on effect on generating action.
More work is perhaps needed to raise the voice of ESG strategy proponents to ensure a united global front.
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