Obstacles to sustainable investing Barriers shrink but still significant

Investors feel better able to pursue ESG investing fully and more broadly than a year ago.

Then 61% globally reported obstacles holding them back; now less than half (46%) do. Indeed, barely a third in Europe (34%) and little more than a quarter in the UK (28%) feel hampered. However, 69% of Middle Eastern investors experience obstacles to their ESG investing, while in the Americas the proportion is 51%, and 56% in Canada.

Investors’ most common complaints are about various aspects of ESG data. There is dissatisfaction with the quality and availability of ESG data — particularly in the Middle East, where 36% feel obstructed by this lack. In Saudi Arabia, 40% do.

But the biggest problem of all is that investors feel issuers’ ESG data is not comparable enough. Half of investors globally find this an obstacle to full and broad ESG investing. Institutions in the Americas (56%), the Middle East (55%) and France (58%) feel particularly strongly about this. How concepts in ESG are defined also worries investors, especially in Europe, where 39% cite inconsistency of definitions as an obstacle. French institutions are particularly irked: 58% of them point to it.

Away from technical ESG factors, investors report three other main obstacles: performance, demand and expertise.

Globally, 39% of investors are put off by a fear that ESG investing offers relatively poor financial returns, while 35% point to lack of demand from asset owners and 30% to a shortage of expertise or qualified staff. Performance is a particular concern in the Americas, where 48% of institutions cite it. But the point is widespread: only in Asia (29%) do fewer than 40% of respondents worry about this (see further discussion in ‘Performance implications’ section below). Weak demand from asset owners undermines interest most in the Americas and the Middle East. In both regions 44% of investors see lack of client demand as an obstacle to expanding their ESG investing.

“The big opportunity is the 36% of all bond investors who do not buy labelled bonds yet, but expect to start buying them seriously for the first time”

The Middle East is also the region most concerned about a lack of expertise. Half of institutions here feel this shortage, while the other three regions cluster between 20% and 26%.

This result is reinforced by Middle Eastern investors’ appetite for advice and information. Of investors there, 56% want external guidance on ESG, the highest level of any region except the 58% in the Americas.

Meanwhile, a small group of institutions is still holding out against ESG investing. Globally, some 9% of investors say they are unwilling to go further in this direction. The scepticism is strongest in Europe. 

In one of the survey’s more unexpected results, given the region’s advanced engagement with ESG practices, an unmatched 18% of investors believe their firm does not want to go further. Conversely, only 5% of investors in the Middle East and 6% in the Americas feel this way.

The scepticism is strongest in Europe. In one of the survey’s more unexpected results, given the region’s advanced engagement with ESG practices, an unmatched 18% of investors believe their firm does not want to go further. Conversely, only 5% of investors in the Middle East and 6% in the Americas feel this way.

Green and sustainable bonds Investor demand set to boom

Labelled green, social and sustainable bonds — where issuers commit to use the proceeds for environmental purposes; to support socially desirable outcomes in areas such as health, housing and education; or some combination of the two — go from strength to strength. COVID-19 has contributed to this, as some issuers, particularly in the public sector, have used the product to raise funding for their responses to the pandemic.

Nevertheless, there is still a long way for the product to go. Of 681 investors in our survey that buy bonds of any kind, 32% are so far buying green and sustainable bonds. Of these, 44% expect to increase their purchases of this product, while 45% will keep their allocations steady. Only 11% expect to reduce purchases.

Around a third of the total say they are unlikely to start buying labelled bonds. The big opportunity for the market is the 36% of all bond investors who do not buy these bonds yet, but expect to start buying them seriously for the first time. That suggests investor appetite for this paper will at least double.

Combining the shares that expect to increase their allocations to this product with those who will start buying for the first time, it is 50% of bond investors globally. The Middle East, Asia and Americas are above average for these future new buyers, who make up 38% and 42% of all investors there. Europe is slightly below average, reflecting the fact that 45% already buy labelled bonds. And of the existing buyers in Europe, 58% will increase their purchasing. The region with the happiest labelled bond buyers is the Middle East. Only 12% of bond buyers already use the product, but all of them say they will buy more in future.

ESG policies and advice Investors get serious about sustainability and want help

Investors’ increasing acceptance of ESG and responsible investing can be seen in their widespread adoption of firm-wide policies on these issues. Over half of investors globally (51%) now have such policies, and in the Americas, 69% have.

A further third of investors intend to develop such policies. This intention is most common in the Middle East (41%) and Asia (39%) and least common in the Americas (23%), where policies are more widespread already. Only 13% do not intend to adopt policies. This stance varies quite widely between regions, from 6% in the Americas (4% in the US) to 23% in Europe (30% in Germany).

As well as adopting firm-wide policies, over half of investors (51%) are also seeking advice and information on ESG. Appetite for this is especially strong in the Americas (58% of investors in the region affirming their appetite and as many as 64% in Canada) and the Middle East (56%). Although the Asian regional average is somewhat lower, 56% of Chinese investors also want ESG advice.

The topic on which investors have greatest appetite for advice is how the economy is likely to develop in response to climate change.

Almost half (49%) of institutions globally are seeking insight on this, with demand especially strong in the Middle East (58%) and Europe (54%). The latter score is striking as Europe has a lower overall demand for ESG advice than other regions.

Other environmental issues also feature strongly among the topics investors most want guidance on. At 48%, the fundamentals of environmental risks and problems rank closely behind the economic impact of climate change as the second most popular.

Demand is strongest in the Americas (54%) and Asia (53%). Despite Europe’s lower regional score here, 53% of French investors are also seeking insight on environmental fundamentals.

Impact is also an area investors want help with. Globally, 46% want advice and information on measuring the impacts of their investments, while 45% seek insight on how to invest so as to promote the UN’s Sustainable Development Goals (SDGs). Guidance on both is especially sought after in the Americas (52% impact measurement, 51% SDG promotion) and the Middle East (51% and 54%, respectively). These issues are also the third and fourth most popular topics with Asian investors, but at lower levels.

European institutions, though, are keener to learn about investing techniques that would enable them to use ESG data more effectively. This topic is important to both German and UK investors (50% each), but much less so to their French peers.

“The topic on which investors have greatest appetite for advice is how the economy is likely to develop in response to climate change”
Investment performance Caution rises about whether ESG lifts returns

Perhaps as a result of the sell-off in financial markets in March, caused by the coronavirus crisis, investors are more cautious about the outlook for returns on ESG investments than they were a year ago.

We asked investors to describe their beliefs about what difference practising ESG, responsible or sustainable investing would make to investment risk and returns. They were given four options to choose from, capturing a range of views.

The most pessimistic view, that ESG ‘always involves accepting lower returns or higher risk’, is now held by 17% of investors — with higher shares in Europe (21%), especially France (26%) and the UK (27%). A year earlier, only 12% thought this.

The second most cautious view is that ESG ‘sometimes involves accepting lower returns or higher risk’. This group outnumbers the first in all regions. The opinion is most widely held in the Americas (46% of investors), but even in the most optimistic region, the Middle East, 35% think this. The global average of 42% is up from 26% a year ago.

This is surprising, considering that several studies have shown ESG assets tending to outperform general markets during the coronavirus crisis. However, investors’ concerns may reflect their general risk aversion after experiencing this year’s exceptionally volatile markets. Conversely, the most bullish view, that ESG strategies are ‘an attractive way of generating outperformance’ is chosen by only 11% (and just 8% in Europe and 4% in Germany). 

A year ago the global figure was 17%. However, there has been a modest swelling of support for the second most optimistic expectation: that responsible investing ‘might involve a chance of lower returns or higher risk, but also has a good chance of generating outperformance’. It now attracts 29% support, with minimal variation between regions. A year ago, it was only a quarter.

0%

believe ESG strategies may or will involve accepting lower investment returns or higher risk

These results should be read in conjunction with the separate question about the reasons why investors care about E&S issues.

Seeking improved risk and return is the most common reason investors give for their attention to E&S. That result is not contradicted by the fact that they have various degrees of optimism about how successful this will be.

Another window on the question of performance — and what investors believe ESG is for — is exploring the trade-offs investors are willing to make between achieving good environmental and social impacts and financial returns. We asked investors how they see their responsibilities, this time letting them choose more than one option (see chart on page 9). The most popular view, held by 55%, is that investors should take into account ESG issues that could affect the performance of their investments. The proportion is higher among larger institutions — rising to 70% among the very largest, with over $100bn under management. But almost as many, 53% globally and 61% in Europe, believe they should avoid investments that have bad impacts on the environment and society.

This is a remarkable result, showing that over half of investors believe their responsibility is not only to their clients, but also to the wider world.

As to how far they will go in pursuit of this objective, investors are divided.

Some 29% believe their responsibility includes choosing investments with positive environmental and social impacts, even if this sometimes involves sacrificing returns. Support for this ranges from 11% in the Middle East to 35% in Europe.

A larger share of 42% say it is right to choose investments with positive environmental and social impacts as long as this does not involve sacrificing returns. The popularity of this view ranges from 34% in the Americas to 54% in the Middle East.