Global Perspectives On Responsible InvestingJun14

Contributed by Meredith Jones, Partner, Global Investment Solutions, Aon

Investor interest in Responsible Investing is on the upswing, but investors continue to cite ongoing frustrations with definitions, data and materiality as lingering barriers to RI adoption. In addition, a number of the institutional investors with whom we speak remain unaware of how their peers are implementing RI initiatives, which also contributes to any discomfort around adoption of Responsible Investment measures.
 
To help remedy these situations, Aon has been actively working to provide investors with set definitions of RI terms and research on the “new Responsible Investing normal” to provide earlier adopters with industry affirmation, best practices and innovative ideas for their RI programs.  As part of this initiative, Aon conducted a global survey of institutional investors from November 2017 to early March 2018, gleaning responses and insights from 223 endowments, foundations, public and corporate pensions and defined contribution plans around the world. We compiled those findings into Aon’s latest paper “Global Perspectives on Responsible Investing,” and wanted to share a short snapshot of the 10 key takeaways in this blog.

1. When asked how their organizations felt about Responsible Investing, respondent answers grouped into a typical bell curve, with 5.4 percent indicating RI is mission critical, 5.4 percent indicating RI is not important, and 38.1 percent indicating Responsible Investing was somewhat important to their organization and another 24.7 percent stating it was very important. The UK, EU and Canada were the most likely regions to cite RI as “mission critical” and foundations were the most likely investor type to do the same.
2. The barriers to RI entry were many and varied. Nearly 40 percent of those polled indicated that their number one hurdle to Responsible Investing was a lack of consensus about the impact of Responsible Investing on investment returns. But others cited a lack of agreement among key stakeholders/Trustees about Responsible Investing or that it was difficult to balance Responsible Investing initiatives with their fiduciary duty.
3. There are a number of global issues that concern investors that are driving Responsible Investing initiatives. Climate change and fossil fuels/carbon footprint seem to be the RI concerns upon which most investors agree, at 42 percent and 43 percent, respectively. Governance issues in the form of bribery and corruption came in third in our poll, with 37 percent of respondents indicating it was a key factor in their Responsible Investing initiatives.  Rounding out the top five concerns were weapons manufacturing or military complex, which tied with renewable energy at 36.5 percent as a key concern.
4. 38.6 percent of survey respondents do not have a Responsible Investing policy, 40.4 percent have a policy in place, and another 14.3 percent indicate that they are in the process of developing a policy. Of those polled, Corporate Pensions were the least likely to have a Responsible Investing policy (74.7 percent), followed by Defined Contribution Plans (66.6 percent). Endowments and Foundations (58.3 percent) were the most likely to have Responsible Investing policies, followed by half of the Public Pensions polled. Geographically speaking, US respondents were the least likely to have Responsible Investment policies (69.6 percent), while investor organizations in the EU and UK were equally likely to have one (47.2 percent). In addition, nearly three quarters of those polled indicated they have no dedicated staff to pursue Responsible Investing initiatives within their organizations. Investors in the EU/Continental Europe were the most likely to have dedicated resources for Responsible Investing, at 27.7 percent, while 81.8 percent of the US investors polled indicated they had no staff on hand focusing on Responsible Investing.
5. Investment managers take note: Globally institutional investors believe you bear significant responsibility for RI initiatives (67.7 percent). Just over a third (36.4 percent) of those polled believe their own organization also bears responsibility for RI, while 28.5 percent expect their investment consultant to take up the reins. Endowments and Foundations were highly likely to indicate that RI is considered an internal initiative, with 47.8 percent stating that their organization is responsible for Responsible Investing initiatives. However, E&F’s were barely edged by Public Pensions, 53.3 percent of whom indicated that the Responsible Investing buck stopped with their organization. Defined Contribution Plans were the most likely to put the onus of Responsible Investing on their investment consultants.
6. Of the four types of RI, respondents that are active in Responsible Investing seem to overwhelmingly favor the integration of ESG factors into investment decisions (47 percent) over other types of RI. Socially Responsible Investing (negative screening) comes in second at 24 percent, mostly based on the strength of respondents from the EU/Continental Europe (40 percent). Impact investing trails into third (6.6 percent), bolstered by Endowments and Foundations, where 11.5 percent engage in this sub-category of RI.
7. A number of respondents also indicated that they implement RI practices through their long-only investments (31.9 percent) or through shareholder engagement/activism or proxy voting (20.4 percent).  Investors in the EU/Continental Europe were the most likely to be active investors, with 35.4 percent of respondents indicating that shareholder engagement was a key element of their RI doctrine. Investors in the US were the least likely to agitate with companies for change. Only 15.3 percent of investors in the US indicated they engage in shareholder activism.
8. Since we’ve established that the majority of survey respondents believe their outside investment managers bear responsibility for RI measures, it was interesting to note what respondents are looking for managers to actually do. Having clear reporting around Responsible Investing and a clear engagement policy with examples of successful engagement topped investor’s wish lists, at 49.7 percent each. The existence of an integrated RI policy was next on the list (47.6 percent), followed by a strong track record of RI performance (41.8 percent). Although it was also interesting to note that only 8.0 percent of those polled indicated that failure of a manager to have a Responsible Investing policy was a firing offense.
9. Going forward, it does appear that momentum is in favor of Responsible Investing, with 31.4 percent of those polled indicating they will evaluate RI in the future for possible inclusion in the portfolio, and another 23.8 percent indicating they will increase or significantly increase their Responsible Investing allocations. For RI to really grow, however, it seems investors still need a few crucial pieces. A number of investors indicated they need to see compelling research on the benefits of RI and ESG to return profiles (49.7 percent), while still others indicate that the lack of agreement around terms and definitions continues to stifle Responsible Investment efforts (48.7 percent). Finally, the investors we polled also indicated that agreement on materiality would also be beneficial to their RI efforts (48.7 percent).
10. As RI continues to gain traction among institutional investors globally, Aon is committed to providing a broad range of capabilities and solution offerings in this rapidly-developing area, including:

• Implementation of fund ESG ratings, which will provide added transparency for Aon’s clients on how and how well fund managers are integrating ESG data into their investment strategies.
• Development of ESG scenarios (eg climate change) for asset allocation purposes.
• Development and implementation of Aon’s own Responsible Investing policy.
• Providing education to investors globally on how to incorporate Responsible Investing and ESG into an investment portfolio and current best practices.
• Creation of an RI framework to establish a standard language around common RI concepts and definitions.
• Partnerships with a number of notable organizations around the world, including being a signatory to the UN’s Principles of Responsible Investment; and a partnership with Cambridge Institute of Sustainable Leadership (CISL).
• Development of research and other thought leadership to help clients judge whether RI initiatives will be beneficial to their portfolios.
• Researching additional funds and strategies that utilize RI strategies like Impact Investing and Socially Responsible Investing.

We recognize that each investor’s RI journey will be unique, but we hope that by providing transparency into investor activity, as well as a completely customizable RI toolkit, that we can help investors around the globe discover what Responsible Investment steps make the most sense for their organizations’ investing goals, values and investment portfolios. Our full report on this survey is available here. 

Click here for index descriptions.

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