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There is an opportunity to exploit a market that remains inefficient but
this may not be the case for long. Growing realisation that ESG can
drive compelling returns will draw more interest and more capital, which
will drive out some or most inefficiencies.
Opportunities will be harder to come by; however, this survey
portrayed an investment approach only beginning to come into its
own. It’s encouraging to see so much capital pouring into ESG-related
investing, even as asset owners and financial professionals alike remain
broadly uncertain about those investments’ ability to provide alpha and
mitigate risk (Figure 4).
The largest proportion of respondents (40 percent) do not consider
Investors’ uncertainty about ESG as an alpha source may derive from
their dissatisfaction with the amount of accessible, relevant data. Just 17
percent of survey participants were satisfied with the quality and quantity
of ESG-related data companies are making available. Conversely,
43 percent of participants were somewhat or completely dissatisfied.
While multiple efforts are underway to close this information gap, the
divergence between the empirical data and the marketplace perception
represents an opportunity that can be exploited for enhanced returns. It
points to the need for thorough fundamental analysis in ESG investment
decisions, especially for investors seeking both alpha and impact in
the long term. Because ESG factors are not yet fully incorporated into
valuations, we believe that investors who understand how to identify
and properly consider these factors will have an advantage.
From divestment to engagement
Qualitative, ESG integrated buy-and-hold investing remains a relatively
new development in responsible investment, which consisted almost
exclusively of negative screens deployed to weed out companies
with particularly objectionable social or environmental practices a few
decades ago. Today, a majority (52 percent) of responsible investors
and professionals consider negative screens a niche tactic—to be used
only by mission-specific investors (Figure 2).
This represents more than a change in investing style. Rather it is
recognition that engagement is more powerful than divestment. Many of
today’s responsible investors believe they can encourage and enact greater
positive change—and increase shareholder value—by engaging with
companies on ESG issues rather than by divesting. An asset manager, who
is a significant shareholder, gains access to company senior management
and boards of directors, developing a voice to advocate for positive change.
These investors view change as a powerful driver of shareholder value.
To be sure, negative screens remain in widespread use and divestiture
campaigns can still generate enormous momentum. In recent years, the
fossil fuel-free movement not only captured headlines, but prompted
commitments to divest totalling in the trillions of dollars, largely driven by
institutional titans including the world’s largest sovereign-investment fund.
According to RBC GAM’s survey of ESG asset owners, wealth
managers, and consultants, investors are taking the fossil fuel-free
movement seriously (Figure 3). Only 26 percent of respondents consider
fossil fuel-free to be a fad and a full 62 percent consider it a lasting
investment issue. Whether this is driven by true philosophical alignment
or merely reflects investors following a popular trend remains to be seen.
Figure 2: Opinions reported on negative screens
Negative screens are primarily for specific mission-related investors
Negative screens serve a purpose across many investor types
Negative screening impacts alpha
I don’t agree with the above statements
Negative screening does not impact alpha
0% 10% 20% 30% 40% 50% 60% 70%
Figure 3: Responses to the fossil fuel-free movement
Do you believe the fossil fuel-free movement is an investment fad or a
lasting investment issue?
It’s a lasting investment issue
It’s a fad
It’s more than a fad
0% 10% 20% 30% 40% 50% 60% 70%
What is alpha?
Alpha is a measure of performance on a risk-adjusted basis. Alpha
measures the performance of an investment against a market
index, since they are often considered to represent the market’s
movement as a whole. The excess return of a fund relative to the
return of a market index is the fund’s alpha.