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How Investors View ESG

August 22, 2017 | Global/Emerging Markets

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A majority of our recent webinar participants (62%) think it makes sense to incorporate environmental, social, and governance (ESG)  into investment decisions, according to a June 2017 William Blair poll —and industry surveys highlight significant growth in ESG adoption by both asset owners and consultants.

The chart below illustrates that U.S. plan sponsor signatories to the Principles of Responsible Investment (PRI) grew by approximately 70% over the past 5 ½ years, while U.S. consultant signatories nearly quadrupled.

This is corroborated by the following chart, based on survey data from Callan, showing that U.S. plan sponsor incorporation of ESG factors grew approximately 70% over the past 4 years.

Breaking ESG incorporation down by plan type, the Callan survey results are not surprising: endowments and foundations have the highest rate of incorporation at about 50%, followed by corporates at about 30% and public funds at about 22%. That is generally consistent with what we see among our client base.

From a geographic perspective, our European clients are more at the forefront of the ESG movement, although we are seeing increasing interest and activity among our U.S. and Canadian clients as well.

The momentum behind ESG integration has been supported by recent guidance from the U.S. Department of Labor clarifying that ESG factors are not inconsistent with fiduciary duty. This has effectively removed what had been a barrier to broader consideration of ESG by pension plan sponsors.

The big question, however, is, “Why does it matter in the first place?” In other words, does ESG have any impact on performance?

The consensus seems to be that ESG considerations are important to mitigating risk and volatility. But we are also seeing increasing evidence that ESG also provides an alpha-enhancement opportunity.

For example, a 2015 Harvard study concluded that materiality is very important—in terms of driving corporate performance, as measured by return on capital.*

In future posts, we'll discuss approaches to implementation, and describe our ESG journey at William Blair.

*Mozaffar Khan, George Serafeim, and Aaron Yoon; “Corporate Sustainability: First Evidence on Materiality”; Harvard Business School; March 24, 2015.