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Do ESG metrics generate alpha?

Investors in Asia are the least convinced globally about the link between alpha generation and incorporating ESG metrics in an investment approach, according to a survey by RBC Global Asset Management.

Nearly two-thirds of global investors are unsure that the adoption of a sustainable investment approach results in alpha generation, as reported by FSA sister publication, ESG Clarity.

Results from RBC Global Asset Management’s 2018 Responsible Investing Survey found that 42% of investors are uncertain about a link between the incorporation of ESG metrics and alpha generation, while a further 20% said they believed there is no link whatsoever.

The survey was conducted with 542 institutional asset owners and investment consultants in the US, Canada, Europe and Asia.

Despite those who are still unconvinced about the alpha-generating potential of a sustainable investment approach, 38% said they believed that integrating ESG factors within investing does assist in generating alpha;  this is nearly double the percentage of respondents from last year who said they think of ESG as an alpha source.

Confidence in ESG factors is highest in the US, with 39% believing that ESG analysis generates alpha; this compares with last year’s 17%. In Canada, 30% of respondents now say ESG can generate alpha, up from 21% last year. The sentiment was also strong in the UK but less so in Asia, the survey noted.

The results are in line with an earlier survey conducted by HSBC, in which only 40% of Asian investors (versus 85% in Europe) said they believe sustainable investing is a driver of long-term financial returns.

Judy Cotte, vice president and head of corporate governance and responsible investment at RBC Global Asset Management, said the large percentage of believers was encouraging.

“Importantly, many institutional asset owners now believe they have a duty to consider a responsible investing approach,” she said in a statement.

“This ongoing shift has significant implications for how large institutional asset pools are allocated, as well as the advice and service provided by consultants and asset managers.”

The survey also found that there has been continued growth in demand for ESG strategies from the institutional market, with 90% of investors saying that they believe ESG integrated portfolios are likely to perform “as well” or “better” than non-ESG integrated portfolios.

Habib Subjally, head of global equities at RBC Global Asset Management in the UK, said as the demand continues to grow, fund houses and consultants will be expected to offer guidance as to the available options.

“As industry acceptance of ESG integration has accelerated and become mainstream, there will be greater focus on ESG-related investment research and its application in the portfolio management process,” he added.

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