ESG Criteria Important for Majority of Investors

A majority of institutional investors consider ESG criteria when making alternative investment allocations, according to research by LGT Capital Partners and Mercer.

Chief investment officers, heads of asset classes and portfolio managers all recognize the positive effects of environmental, social and governance (ESG) integration on risk-adjusted returns, according to Tycho Sneyers, managing partner and chairman of LGT Capital Partners ESG Committee.

Research reveals the majority of institutional investors actively consider ESG criteria when making alternative investment allocations. Sneyers believes ESG analysis has moved beyond ethical concerns and has firmly found its place as a risk and investment management topic. A survey by LGT Capital Partners and Mercer shows most institutional investors are confident that ESG improves risk-adjusted returns and is an important aspect of risk and reputation management.

The survey analyzes 97 institutional investors in 22 countries. Research into why and how these investors incorporate ESG considerations in alternative asset classes reaches four key conclusions:

  • More than three-quarters of respondents incorporate ESG criteria when investing in alternative asset classes.
  • More than half (57%) believe incorporating ESG criteria has a positive impact on risk-adjusted returns. A mere 9% think it lowers returns.
  • Regarded with significance are issues with the potential to impact a company’s long-term risk, reputation or overall performance. Topics garnering strong support include carbon intensity, controversial weapons and bribery and corruption, while exclusionary criteria such as alcohol or tobacco are rarely considered.
  • Among the institutional investors who incorporate ESG criteria into investment decision-making, 54% have done so for three years or less. This suggests rising expectations for investment managers over time, as well as a need for greater clarity on techniques and strategies for ESG incorporation to help investors progress more quickly.

“It is encouraging to see investors becoming increasingly aware of the potential risks and opportunities these issues can present to portfolios,” says Deb Clarke, global head of investment research at Mercer. “Incorporating ESG considerations into investment decisions strengthens a portfolio’s defense against risks arising from governance failures, changes in policy and regulation, and environmental and social trends. It can also put investors in a better position to take advantage of opportunities arising from a shift towards more sustainable economic growth.”

More information about the “Global insights on ESG in Alternative Investing” research is available here.