In May 2017, the CFA Institute surveyed its members on how they use ESG integration in their investment practices as well as to gauge their perceptions of ESG issues and data. 

Having reviewed the global results from the survey, the PRI observed that the US trails the rest of the world regarding ESG integration in areas such as adoption rate, frequency of use, level of conviction in value proposition and belief in the financial impact of climate change.

These findings highlight the need for more research on the relationship between ESG integration and financial performance to help US investors capitalize on the opportunities uncovered by ESG research. The PRI found the below observations from the CFA survey to be the most compelling. We also explain how the three studies covered in this paper might influence positive change in the perceptions of ESG integration among US investors.

US investors poised to benefit from…empirical studies on the materiality of ESG integration

  • A higher proportion of AMER members than those in APAC and EMEA said that a lack of demand from clients/investors as well as materiality issues prevent them from considering ESG issues.
  • AMER members were just behind APAC members in saying that a proven link between ESG and financial performance would prompt them to begin considering ESG issues.
  • A higher proportion of respondents in EMEA than in AMER and APAC systematically consider ESG issues in their investment analysis.

The PRI, BofA Merrill Lynch Global Research and Calvert Research and Management studies aim to address much of the gaps in empirical research that have created barriers and reasons for some skepticism among US investors, as reflected by the CFA survey. Findings from these studies further uncovered the importance of demonstrating the materiality of ESG factors based on: momentum (trending scores) and tilt (absolute point-in-time scores) strategies; regions; sustainability pillars; market capitalization ranks in equities and credit quality distributions in fixed income; and industries.

…research on the materiality of individual sustainability pillars

  • A significantly higher proportion of members in APAC and EMEA than in AMER take ESG issues into account in their investment analysis/decisions, with governance being accounted for the most.
  • AMER members trail behind EMEA in their belief that climate change will impact financial markets.

The CFA survey suggests that among the E, S and G pillars, investors tend to capture governance risk the most across all markets. This finding is consistent with the expectation that investors prioritize corporate governance issues given that deficiencies in this area were responsible for the financial crisis. Furthermore, issues such as executive pay, board independence and diversity, culture of ethics and compliance tend to be material, overarching themes across all industries. Disclosure and data transparency within regular financial filings is also much greater in the area of governance than it is within the environmental and social pillars, where information sometimes needs to be uncovered through less traditional sources such as civil society or labor union reports, and social media outlets. Research by BofA Merrill Lynch Global Research and Calvert Research and Management could further suggest that there is greater alpha opportunity associated with environmental and social factors.

…research on the materiality of ESG factors in fixed income investing

  • A higher proportion of respondents in EMEA than in AMER and APAC integrate ESG analysis in fixed income, while those in APAC are more likely to integrate ESG analysis in private equity.

The CFA survey might suggest that US investors believe that equities compared to bonds tend to be more sensitive to ESG-related headlines, similar to the way they are to earnings announcements. The corporate bond market is arguably less affected by short-term noise, and reacts to issues that have a longer-term bottom line impact. For instance, a bond investor is often cognizant of a company’s leverage target; if a company announces a share buyback, dividend distribution or M&A transaction that the investor does not believe is dilutive nor will compromise the company’s credit profile, he/she will be less likely to reduce risk in that name. The same line of reasoning would be applied to an ESG-related headline. The Calvert Research and Management study does, however, demonstrate that ESG integration has similar efficacy in fixed income, suggesting that there is a recognition that material ESG factors can affect the long-term credit profile of a company as reflected in credit spread behavior. 

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    Financial performance of ESG integration in US investing

    February 2018