North American investors struggle with complexity of ESG investing

Only 13 per cent of North American institutional investors said they would consider public statements against companies a “successful” way to trigger change in companies

Their hearts may be in the right place, but global institutional investors are struggling with the complexity that sustainable investing presents.

A survey of 750 institutional investors by Schroder Investment Management Ltd. suggests 80 per cent of global institutional investors find sustainable investing challenging, while 59 per cent of the investors that collectively manage $26.8 trillion in assets, cited ‘greenwashing' as a major obstacle to meeting their goals focused on environmental, sustainable and governance themes. Around 85 of the respondents were from Canada.

“Investor concern about greenwashing and the lack of transparency and data continues to be a major hurdle for further sustainable investment adoption. Interestingly, cost concerns are also rising,” according to the survey. ‘Greenwashing' refers to companies presenting misleading information about their processes, products or services to appear more sustainable than they really are.

Still, 64 per cent believe engaging on environmental issues such as climate change or the use of fossil fuels are the most important stewardship topics, and 47 per cent are keen to invest in funds that are specifically aligned to environmental themes, according to the survey published last month. Institutional investors also believe integration and positive screening remain central to implementing sustainable investing, while negative screening remains less popular.

“This year's results highlight that inclusive approaches are increasingly being viewed as an important aspect of driving change, rather than simply divesting,” the survey noted.

But 53 per cent of investors were also concerned about the lack of transparency and reported data (compared to 48 per cent last year) as a major challenge to sustainable investing, while 46 per cent fretted over difficult measuring and managing risk (compared to 33 per cent in 2020).

There was also a touch of philanthropy in the views of respondents this year. As many as 54 per cent cited their desire to positively impact society and the planet to be their primary reasons to invest sustainably, beating last year's top choice of corporate/internal values.

“Regulatory and industry pressure (43 per cent) continues to be an important motive, particularly as we have seen an unprecedented number of new regulations and standards emerge in recent years,” the survey said.

Compared to their global counterparts, North American institutional investors were less likely to raise their voice to influence companies to make sustainable change.

Only 13 per cent of North American institutional investors said they would consider public statements against companies a “successful” way to trigger change in companies. In contrast, European investors (28 per cent), Latin American (21 per cent) and Asia-pacific investors (18 per cent) saw that as a preferred route.

North American institutional investors were also less willing to vote against companies in order to drive change, with only 37 per cent agreeing to do, compared to 55 per cent in Latin America and 40 per cent in Asia-pacific.

“Societal concerns have always been an important aspect of ESG for North American investors. As lockdown took hold, the working conditions of essential workers became part of the mainstream conversation,” Sarah Bratton Hughes, head of sustainability North America at Schroders.

“Therefore it is no surprise to see that 41 per cent of North American investors feel that sustainable investing has become more important. Unlike global peers who tend to be more focused on environmental issues, consistently throughout the survey, North American investors placed a greater focus on supporting the needs of workers in areas such as healthcare benefits, wages, workplace safety and diversity.”