Environmental, social and governance factors are becoming increasingly important—not just to individual investors, but to institutional investors, who are increasingly including responsible or socially conscious investing strategies in their portfolios.
As a result, according to research from Cerulli Associates, consultants are finding that they need to incorporate ESG factors into their manager selection decisionmaking process. More than half (53 percent) of consultants polled by Cerulli have dedicated resources for ESG manager research, and another 20 percent are considering adding resources.
With interest in ESG investing growing, it's perhaps not surprising that the Department of Labor recently issued new guidance on the subject for plan sponsors who want to add such investing options to the mix in their plans.
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And why should sponsors care? Employees think better of their employers, according to research from Calvert Investments, when those employers give them the option of filling their retirement portfolios with socially responsible investing options.
But it's not just about doing good—it's about doing well, too.
Supporters of ESG believe that good governance and responsible management of social and environmental issues are material to long-term financial performance.
And, increasingly, not just investors but consultants "believe that ESG matters are vital considerations to mitigate risk," the report said. "As a result, investment consultants are deepening their due diligence efforts to better understand manager integration of ESG, as well as expand coverage of responsible investing products."
In its research, Cerulli found that the managers it surveyed said that "values and mission-based considerations" is one of the primary factors driving demand for responsible investing; 76 percent of managers, it said, believe it is a significant factor.
That being the case, investment consultants are tracking a growing number of products that incorporate responsible investing—Mercer, for example, "tracks and rates more than 6,000 products on their incorporation of ESG considerations, as these issues can have a meaningful impact on long-term risks and returns."
A CFA Institute study cited by the report found that 74 percent of manager respondents "take ESG factors into account when making investment decisions, and the single most important reason they do so is to help manage investment risks. Another 44 percent also cite responding to customer demand as a significant driver."
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