While more institutional investors are going “all in”, others stay on the sidelines

Key Highlights:

• More than 70% of institutional investors use ESG principles as part of their investment approach and decision-making process
• A positive performance impact (mitigating risk and enhancing returns) is now the top-cited reason for incorporating an ESG-based approach
• Cyber security ranks as the most important ESG issue for institutional investors surveyed
• On average, institutional ESG-based portfolios are 61% actively managed

TORONTO, October 16, 2019 —Institutional investors in Canada, the United States and the United Kingdom who apply environmental, social and governance (ESG) principles are committing more of their assets to this approach than ever before, according to the 2019 RBC Global Asset Management (RBC GAM) Responsible Investing Survey. Moreover, these investors are adopting an ESG-based approach specifically because they view it as a way to enhance returns and mitigate risk.

The RBC GAM survey revealed that in key markets, institutional investors are shifting more of their assets to an ESG-based approach. Regionally, the percentage of survey respondents who report using ESG principles “significantly” as opposed to “somewhat” rose slightly in the US (up about 3% from 2018), more significantly in Canada (up over 5%) and especially rapidly in the UK (up 30%). This group of adopters is also more convinced of the tangible value that an ESG-based approach provides to their portfolios. Mitigating risk and enhancing returns is now the number one reason institutional investors are incorporating this approach, with 53% of respondents citing it this year.

RBC GAM’s research also suggests that the responsible investing market is showing signs of maturing. After two consecutive years of rapid growth in the adoption of ESG investment strategies, this growth slowed in 2019. The percentage of institutional investors who said they use ESG principles as part of their investment approach and decision-making process remained relatively flat compared to last year, at 70%. However, on a regional basis, the percentage of institutional investors in the UK and Canada who “significantly” or “somewhat” adopt ESG factors continued to tick upward, reaching 97% and 80%, respectively. In the US, ESG adoption was flat versus 2018, at around 65%.

“This new data confirms that while the multi-year trend of rapid increases in ESG adoption by institutional investors may be tapering off, the vast majority of these asset owners are still committed to using ESG principles in their investment process,” said Melanie Adams, Vice President and Head of Corporate Governance and Responsible Investment at RBC GAM. “It is also noteworthy that institutional investors in the US, Canada and the UK, who already significantly incorporate ESG into their investment decision-making are more convinced than ever that this approach helps lower risk and increase returns, and these investors are committing a larger percentage of their portfolios to an ESG-based approach.”

Global Highlights

Responsible Investing: An Evolving Landscape is RBC GAM’s fourth annual survey of institutional investors’ perceptions and intentions regarding responsible investing. For this year’s report, RBC GAM, which includes BlueBay Asset Management, surveyed a total of 799 institutional asset owners, investment consultants and investment professionals in the United States, Canada, Europe and Asia. Key findings from the survey include:

Diverging views on the performance of ESG investing: The RBC GAM survey reveals a divergence of views about the value of ESG on investment performance, with “significant” adopters of ESG expressing greater confidence, but the full survey sample expressing more doubts in this area. For example, the percentage of respondents who believe an ESG-based portfolio will perform worse than a non-ESG-based portfolio increased from 10% to 18%. When also asked about ESG’s ability to mitigate risk, the percentage of respondents who said they were not sure rose to 24% this year from 18% in 2018. However, in contrast to the full survey sample, respondents who identified as “significant” adopters of ESG held fast in their conviction in this area in 2019, with 98% saying that an ESG-integrated portfolio would perform as well or better than a non-ESG-integrated portfolio.

What keeps institutional investors up at night? Cyber security: This year, the RBC GAM survey asked respondents to rank which ESG issues they are concerned about when investing. Cyber security ranked first globally, as 67% of respondents said they were concerned or very concerned about it, followed by 66% of respondents who had concerns with anti-corruption. When examined regionally, Europe and the UK combined ranked climate change as the No. 1 concern. In Canada, anti-corruption ranked first, whereas cyber security ranked top overall in the US.

Institutional investors are more likely to choose active management for ESG portfolios: For the first time, survey respondents were asked what percentage of their portfolio under the umbrella of responsible investing is actively managed. Despite the rise of passive management as a trend globally, the overall average level of institutional ESG-based portfolios that is actively managed is 61%, according to the survey data. Among institutional investors surveyed, 28% said their entire ESG-based portfolio is actively managed, while 10% said their entire ESG-based portfolio is passively managed.

Investors still prefer engagement over divestment: The RBC GAM survey data suggests that institutional investors prefer to engage with corporate management, rather than divest, as a way to influence company behaviour. In the context of the “fossil fuel free” movement, investors came down squarely on the side of engagement, as they did in last year’s survey. However, their enthusiasm for engagement appears to have diminished: 39% of respondents in 2019 said engagement is more effective than divestment, down from 45% last year. The number who said divestment is more effective edged up to 10%, compared to 8% last year.

Majority of US investors are skeptical about gender diversity targets: In the 2018 survey, three-quarters of respondents said gender diversity on corporate boards was important to them. This year, when the question was phrased in terms of whether corporations should adopt gender diversity targets, most investors said no. To be sure, it was a close vote: 52% said no and 48% said yes. The highest no vote came from the US, at 55%, while the highest yes vote, 55.6%, came from Europe and the UK combined.

Shifts in negative screening: Similar to 2018, three quarters of respondents said they do not apply negative socially responsible investing (SRI) screens, which is in line with their preference for engagement over divestment. But for those investors who do apply negative screens, this year’s results point to new trends. As in 2018, the cluster munitions and landmines category remains the most used screen, but it witnessed a 10% decrease this year. There were increases this year in the percentage of institutional investors who screen out gaming (37% of respondents who use screens, up 5%) and nuclear power (27%, up 6%). The application of fossil fuel related screens grew modestly in 2019 at a global level, but regionally the picture was more pronounced, as the use of this screen grew by over 10% in Canada (to 33% of respondents who apply screens) but declined by 15% in the US (to 44%).

“While institutional investors who already significantly incorporate ESG principles appear more convinced than ever before that this approach adds value, there still remains a lot of uncertainty around ESG in the broader marketplace,” said Habib Subjally, Senior Portfolio Manager and Head of Global Equities at RBC Global Asset Management (UK) Limited. “With this increased uncertainty, asset managers, financial advisors and consultants will be called upon to offer guidance to their clients about responsible investing options that support their long-term financial goals.”

About RBC Global Asset Management

RBC Global Asset Management (RBC GAM) is the asset management division of Royal Bank of Canada (RBC) and includes money managers BlueBay Asset Management and Phillips, Hager & North Investment Management. RBC GAM is a provider of global investment management services and solutions to institutional, high-net-worth and individual investors through separate accounts, pooled funds, mutual funds, hedge funds, exchange-traded funds and specialty investment strategies. The RBC GAM group of companies manage approximately $450 billion CAD in assets and have approximately 1,400 employees located across Canada, the United States, Europe and Asia.