A survey of more than 500 portfolio managers has shown that, even when they are running dedicated sustainability strategies, they don’t consider environmental and social (ES) issues to be key drivers of performance.
Researchers Alex Edmans, Tom Gosling and Dirk Jenter asked 290 traditional and 219 sustainable investors about their beliefs and objectives when it came to ES topics.
The study focused on active equities strategies, with just under half (223) of those covered being marketed in the US, and the rest predominantly in the European Union and UK.
“Importantly, and in contrast to other surveys, we did not survey stock analysts or governance/sustainability specialists, instead focusing exclusively on portfolio managers who make investment decisions,” explained the final paper, published last week.
“Our first question asked respondents to rank the importance of actual ES performance (not ratings) for long-term firm value relative to five other value drivers: strategy and competitive position, operational performance, corporate culture, governance, and capital structure.”
ES performance received the lowest average support, even among sustainable investors.
Gosling, an executive fellow at London Business School, told IPE the findings offered a “reality check” about the progress and importance of sustainability within financial decision making.
“There’s all this talk about how critical it is to performance, but it consistently came bottom for portfolio managers,” he said.
“That’s not to say that it’s not important, but the reality is that when asset managers see their primary duty as maximising returns, they generally don’t see ES performance as part of that — even the ones running sustainability funds.”
“The reality is that when asset managers see their primary duty as maximising returns, they generally don’t see ES performance as part of that – even the ones running sustainability funds”
Tom Gosling, executive fellow at London Business School
The survey results highlighted the fact that portfolio managers see their fundamental role as maximising returns, and only 27% of investors – 24% of ‘traditional’ participants and 30% sustainable – were prepared to tolerate companies sacrificing even one basis point of annual return to strengthen their ES performance.
“Instead of having an objective function that trades off social against financial value, fund managers take ES performance into account largely to improve financial returns, or […] to satisfy constraints,” noted the paper.
Those constraints include policies and requirements at company, fund and client level.
Gosling said it was “unlikely” that portfolio managers would make anything but financially-optimal sustainability decisions unless an asset owner had put very specific constraints into the mandate.
“And that approach still only gives you a limited expression of your preferences, and it doesn’t result in very sophisticated trade-offs being made.”
The study also revealed that a portfolio manager’s belief about the role of ES performance affects how they invest, which Gosling said asset owners should bear in mind when awarding mandates.
“So an asset manager who believes ES performance is a driver of returns is more likely to overweight or underweight companies accordingly, and to engage with companies to improve. And those who think ES issues are irrelevant will only do what is clearly required in their mandate,” he explained.
“What’s fascinating is that the study shows that who believes in ES as a driver of returns isn’t split clearly across sustainable and traditional funds – you have traditional portfolio managers who believe in it, and sustainable managers who don’t.”
Gosling said the findings suggest that asset owners could get more ES performance from their managers in two ways: by making sure the constraints are very clear in a mandate, or understanding the portfolio manager’s beliefs about the issue.
“A sustainable mandate itself is not necessarily going to get more sustainability,” he concluded.
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