The Reality of Sustainable Investing: Are Asset Managers Truly Committed?
The asset management industry has increasingly embraced the concept of sustainable investing, with many firms publicly committing to environmental and social (ES) principles. However, a recent study led by Dirk Jenter, alongside colleagues Alex Edmans and Tom Gosling, raises critical questions about the actual commitment of these firms to sustainability in their investment decisions. Their research, which surveyed 509 equity portfolio managers, reveals a complex landscape where the pursuit of profitability often overshadows genuine sustainability efforts.
The Rise of Sustainable Investing
In recent years, sustainable investing has gained significant traction, with thousands of asset management firms signing the U.N. Principles for Responsible Investment and rebranding their funds to include “sustainable” in their names. Advocates argue that incorporating companies’ ES performance into investment decisions can lead to better corporate citizenship, reduced carbon emissions, and a more equitable society. Yet, the question remains: do asset managers genuinely prioritize these principles, or are they merely paying lip service to a growing trend?
Insights from the Survey
The study conducted by Jenter and his colleagues aimed to uncover how equity portfolio managers—both from traditional and sustainable funds—integrate ES performance into their investment strategies. The findings were revealing. A significant majority of the surveyed managers, including those managing sustainable funds, indicated they would not sacrifice even a fraction of a percentage point in returns to support ES goals. This sentiment underscores a prevailing belief in the industry: fiduciary duty to clients takes precedence over altruistic motives.
Ranking of Value Drivers
One of the key aspects of the survey involved asking managers to rank the importance of various factors influencing long-term firm value. Surprisingly, both traditional and sustainable fund managers ranked ES performance last, below critical factors such as strategy, operational performance, governance, corporate culture, and capital structure. While this ranking does not imply that ES performance is deemed irrelevant, it highlights a prevailing mindset that prioritizes financial metrics over social responsibility.
The Financial Materiality of ES Issues
Despite the low ranking of ES performance, the survey revealed that a substantial number of managers recognize the financial significance of specific ES issues. Approximately 85% of respondents rated at least one ES issue—ranging from greenhouse gas emissions to employee well-being—as material to financial performance. This acknowledgment suggests that while ES factors may not be the primary focus, they are still considered relevant in the context of financial returns.
Expectations for Returns
When exploring expectations for stock returns, the survey found notable similarities between traditional and sustainable fund managers. A significant 73% of sustainable fund managers believe that companies with strong ES performance will deliver positive abnormal returns, a sentiment echoed by 45% of traditional managers. Interestingly, many view ES performance as a signal of overall company management quality rather than a direct contributor to financial success.
The Role of Constraints
One of the distinguishing features of sustainable investing is the presence of ES-related constraints that guide investment decisions. The survey revealed that 84% of sustainable fund managers reported making different investment choices due to firmwide ES policies, fund mandates, or client preferences. However, traditional fund managers also face similar constraints, with about two-thirds indicating that they have adjusted their decisions based on ES policies or client concerns.
These constraints can lead to paradoxical outcomes, where fund managers avoid stocks they believe could enhance returns or diversification. In some cases, this approach may inadvertently reduce their overall ES impact by steering clear of companies that could benefit from improved management practices.
Implications for the Future
The findings of this research carry significant implications for the asset management industry. Firstly, it suggests that the industry is unlikely to spearhead improvements in aggregate ES performance among firms. Most fund managers prioritize financial returns and do not perceive firms as systematically underinvesting in ES initiatives. Consequently, they are inclined to invest in ES leaders only when these companies offer superior financial returns.
Secondly, the distinction between traditional and sustainable funds is not as clear-cut as it may seem. Both types of funds predominantly focus on financial objectives while grappling with various ES constraints. This overlap challenges the notion that sustainable funds are fundamentally different from their traditional counterparts.
Lastly, the labels attached to funds can be misleading. Investors often rely on fund names as indicators of investment philosophy, but the reality is more nuanced. Many sustainable fund managers prioritize financial returns, while traditional managers may consider ES performance if it aligns with their financial goals. Therefore, investors seeking genuinely sustainable portfolios must look beyond labels and scrutinize the actual investment practices of funds.
Conclusion
As the asset management industry continues to evolve, the commitment to sustainable investing remains a topic of debate. While many firms publicly endorse sustainability principles, the reality is that financial performance often takes precedence in investment decisions. The research conducted by Jenter and his colleagues sheds light on the complexities of this landscape, revealing that both traditional and sustainable fund managers share similar beliefs and constraints. For investors, this underscores the importance of conducting thorough due diligence to ensure that their investments align with their values and expectations for sustainability.