US - Plan sponsors expect moderate growth in SRI over the next two years, while 75% of instituional investors believe that environmental, social, and corporate governance (ESG) factors can have a material impact on investment performance.
According to a Mercer Investment Consulting survey of 183 US institutional investors, 22% of respondents were currently involved in SRI, while an additional 6% intended to adopt an SRI strategy within the next two years.
Survey respondents did cite several barriers to further adoption of SRI, including a lack of demand from stakeholders, the belief SRI could reduce returns and increase risk, and the view that SRI was too costly in terms of money and staff time.
As for ESG factors, a significant majority of respondents (61%) believed they could be material to investment performance, with 14% stating such factors were “very material”.
Corporate governance was unsurprisingly viewed as the most important ESG factor in mainstream decision making, as 64% of respondents ranked it “very important”.
Second in terms of importance was sustainability (39%) - the concept of meeting present needs without compromising the ability of future generations to meet their needs - followed by employee relations (33%).
Climate change was considered the least important factor, which Mercer said might come as a surprise to some, given that institutional investors around the world have rallied around climate change as a relevant investment risk. But securities prices had been immediately impacted by corporate governance scandals, while climate change had yet to have as profound an effect on securities prices, said Rich Nuzum, Mercer IC head of investment consulting business in the Americas.
It is not surprising that corporate governance is viewed as the most important ESG factor in investment decision making,” said Nuzum. “Recent scandals have clearly demonstrated the materiality of governance to corporate and investment performance. Our survey results show that plan sponsors are increasingly assigning value to issues such as corporate governance, sustainability, and employee relations. This is something to which their investment managers will have to respond. Half of respondents consider the use of MFOE managers to be a category of SRI. However, the majority of survey respondents did not currently have allocations to such managers, and were not considering them. For those plan sponsors that do use MFOE managers, the next two years will likely see an increase in such allocations, the survey showed.
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