Investor sentiment

2021 ESG Investor Insight Report

April 21, 2021 - 21 min read

Executive Director, Natixis Center for Investor Insight – Natixis Investment Managers – US Distribution

ESG Investing: everyone’s on the bandwagon. But where’s it actually going?

After hearing evangelists and early adopters extol its virtues for more than a decade, ESG (Environmental, Social and Governance) investing logged a breakout year in 2020. The last quarter of the year proved to be a watershed moment as ESG strategies brought in record flows of $152 billion, reached record asset levels of $1.6 trillion, and drove a record number of 196 product launches.¹

On the outside, it looks as though ESG is winning over investors. But while the success is worth noting, it also gives investors and the investment industry reason to pause and pose a critical question: “What exactly are we trying to do?”

Results from a series of surveys with financial professionals, institutional investors, and fund selectors released between 2020 and 2021 shows that answer isn’t always clear. The motives are many, doubts about investment success need to be addressed, and more concrete measures of non-financial results are needed.

Now that ESG strategies are gaining traction, greater clarity is needed not only to maintain the momentum, but more importantly to set realistic expectations for the financial results and the societal impact. In many ways, the question of what investors are trying to accomplish breaks down into two camps: Make a better world, or be a better investor.

As the investors warm up to the potential of ESG, our research offers insight into five key questions about ESG investing:

Is ESG just another bubble? With all the talk, it’s easy to dismiss ESG as hype, but its sustainable long-term growth suggests it’s much more than a passing fad.
Are the ESG goals financial or non-financial? Professional investors are defining a clearer role for ESG in addressing organizational and societal goals, along with key portfolio objectives.
Do ESG methods match the motives? Broad-based adoption of ESG has given investors more choices, making it all that more critical to ensure they are adopting strategies designed to meet their objectives.
How do you measure ESG performance? A flood of information is available to ESG investors, but a lack of consistency makes it hard to gauge which data defines success.
Do we share a common language on ESG? Even as regulators move to standardize ESG taxonomy, investors need to find common ground for defining expectations.

Table of contents

Is ESG just another bubble?
Are the ESG goals financial or non-financial?
Do ESG methods match the motives?
How do you measure ESG performance?
Do we share a common language on ESG?

Download Executive Overview:

2021 ESG Investor Insights Report Executive Overview

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1 Is ESG just another bubble?

With all the attention it’s gained over the past year and the frothy trading seen in sustainable stocks, some warn that a green bubble is forming. But even though the records were set in 2020, it’s important to recognize ESG isn’t really an overnight sensation.

The idea of putting capital to work to address ESG issues central to socially responsible investments can be traced back to the environmental movement of the 1970s and has evolved from negative screens to a wide range of strategies for achieving both financial and non-financial results.

Growth today, however, is not driven solely by investment objectives. Asset owners and asset managers are facing external pressures both from regulators pushing the industry to enact more sustainability measures and from investors demanding more sustainable investments.

On the policy side, the European Union has upped the ante with the corporate reporting guidelines requiring listed companies to publish a non-financial statement of environmentally sustainable economic activities. The UK has implemented mandatory climate-related disclosures. Regulators in Singapore have set guidelines on environmental risk management. France has established mandatory ESG reporting for asset managers. And most recently, the EU implemented the Sustainable Finance Disclosure Regulation requiring asset managers to disclose ESG metrics for all products regardless if they’re labeled ESG or not.

Many countries are making ESG a priority

Source Natixis Investment Managers (as of 3/23/21). For illustrative purposes only. Regulatory environment can change at any time.

More professionals adopt ESG

The convergence of these factors is central to higher levels of adoption among professional investors. Our data shows that between our 2019² and 2021³outlooks, the percentage of institutional investors implementing ESG rose by 18%, climbing from 61% to 72%.

ESG adoption is increasing among institutions and fund selectors

Sources: Natixis Investment Managers 2019², 2020⁴ and 2021³ Global Institutional Investor Outlooks and 2019,⁵ 2020¹¹ and 2021⁶ Professional Fund Buyer Outlooks

Fund selectors who manage investment platforms at private banks, broker/dealers and other organizations also reported higher levels of adoption, with the number implementing ESG rising from 65%⁵ to 77%⁶ over three years.

Financial advisors who represent many of these platforms provide an idea of just how much individuals have actually invested in these strategies. Globally, advisors report that 16% of client assets are invested in ESG. Those countries with the highest level of investment include Germany, where advisors say 36% of client assets are invested in ESG, France where it’s 29%, and Switzerland where it’s 27%.⁷

Future holds more growth

Fund selectors are likely to believe those numbers will increase, as 86% of those surveyed plan to maintain or increase their ESG offering – only 2% plan to trim. This is likely to be amplified with the focus on model portfolios, as 64% say their firm will add ESG models in the next 12 to 24 months.⁶ So while ESG got more attention during the past 12 months, it already had momentum. ESG was primed for growth, and investors of all types found clearer motivation to drive their decisions.

Do age and affluence affect views on ESG?

The answers might surprise you.

Despite their differences, a wide range of investors largely agree about ESG investing. We asked survey participants of varying generations and asset levels whether they agreed with the following statements – click below to dive into the data.

Sources: Natixis Investment Managers, 2020 Global Survey of Financial Professionals⁷and 2019 Global Survey of Individual Investors¹⁶

2 Are the ESG goals financial or non-financial?

In terms of determining if they’re implementing ESG to be a better investor or make a better world, the answer from institutional investors appears to be “yes.”³ But not long ago the answer may have been more like “whatever.”

Since first asking institutional investors about their motivations for implementing ESG strategies in 2014, we have seen a significant evolution and enlightenment in their views. Seven years ago, almost half (48%) of those surveyed said ESG served mostly as a PR measure.⁸ In 2015, institutional teams most frequently said they implemented ESG because it was prescribed by their organization’s investment policy statement, or IPS (31%). And while just over one-quarter thought it might also help them minimize headline risk, few (15%) saw the potential for better risk-adjusted returns. Fewer still (10%) saw alpha potential.⁹

Institutional investors cite a wide range of motivations for implementing ESG

Source: Natixis Investment Managers, 2021 Institutional Outlook³

In the past six years, the language of ESG has become clearer and started asking the question in a different way, offering “aligning assets with organizational values” as an option in our survey. This is what 57% of institutions say is the reason they implement ESG in 2020. Even still, one-quarter say it’s because the investment policy statement (IPS) requires them to, making ESG sound like something they have to do rather than seeing it in terms of organizational objectives.³

Beyond the values alignment, 35% also say ESG helps influence corporate behavior, which can answer both sides of the better world or better investor question. Influencing corporate behavior can be as much about getting companies to perform better on ESG issues as encouraging them to improve financial performance. More than a quarter (26%) also see ESG as a way of helping to make a better world; a stronger investment narrative is emerging.³

Most significantly, sentiment is shifting on the alpha potential of ESG: In our 2015 survey,⁹ half of institutions said there was alpha to be found in ESG. Today, six in ten (62%) say there is. More than one-third of institutions (34%) say ESG helps minimize headline risks, and they’re more likely to say it produces higher risk-adjusted returns than in 2015 (29% in 2020 vs. 15% in 2015).³

Give the people what they want

Seven in ten fund selectors also see alpha potential for ESG, but their motivation for expanding its use is even clearer – clients want it. Six in ten (61%) say investor demand is driving their adoption of ESG. Values also factor into the decision, as more than half (55%) implement ESG for better alignment. Another 35% say it’s part of a firm mandate.⁶

The need to address client values cannot be underestimated. In fact, 76% of the individuals in our 2018 investor survey said it was important to align their assets with their personal values – including 27% who say it is very important.¹⁰

Fund selectors cite a number of factors contributing to increased demand from clients, but growing social awareness (75%) tops the list. Half owe it up to ESG becoming more mainstream, and four in ten (42%) say it comes down to investors looking to be part of the green economy. Concerns about climate change (36%) and changing client demographics (27%) also factor into the equation.⁶

Why fund selectors say they are adding ESG

Source: Natixis Investment Manager 2021 Professional Fund Buyer Outlook⁶

ESG is also factoring into investment process for a large number of fund selectors. More than three-quarters (77%) say ESG factor analysis is integral to sound investing, and half (48%) go so far as to say it’s as important as fundamental analysis.⁶

A growing number of financial advisors are also beginning to see an investment role for ESG, including six in ten who cite alpha potential. This includes 79% of advisors in Italy, 76% in Spain, and 73% in France. Globally, another 57% see it as providing an added layer of risk management to client investments.⁷

With an increasing number of selectors and institutions adopting ESG practices, it’s no wonder that 59% of advisors overall (84% in Italy, 75% Germany, 70% France) believe ESG will become a standard practice within the next five years.⁷As it does, all players will need to consider which strategies can best address their ESG objectives.

3 Do ESG methods match the motives?

Not only has the number of professional investors implementing ESG strategies grown considerably, they are also deploying a wider range of strategies, which allows them to address a wide range of objectives.

Integration

ESG integration is most frequently deployed by institutions³ (48%) and fund selectors⁶ (54%). In this approach, they take into account ESG issues that can materially affect company performance in their analysis. Ultimately, the goal is to identify risks and opportunities that may not show up on the balance sheet.

Yet even as large numbers of professionals practice integration, they still have questions. More than half (53% of institutions³ and 55% of fund selectors⁶) believe that companies with better ESG records can generate better returns. But given the wide range of factors that can be considered under ESG, determining which ones matter poses a challenge. In fact, almost three-quarters of institutions³(74%) and two-thirds of fund selectors⁶ say it’s hard to know which data is material to investment analysis.

Aligning investor objectives with ESG investing tools

There are many pathways to ESG investing – What is the investor trying to achieve? Matching values? Having an influence on companies or an impact on the world? Managing risk and performance aspects? The purpose should lead to the appropriate ESG tool.

For illustrative purposes only. The checkmarks indicate our interpretation of the currently available, evidence-based, academic research about the consequences and impacts of applying specific ESG tools. This is a simplistic summary of a very broad body of research and should not be interpreted as absolutes; i.e. not every case of ESG integration leads to better risk management or alpha, and not every case of active ownership has real world impact. The checkmarks should be interpreted as: “If executed properly, with sound judgment, as a general rule where there is a checkmark these ESG tools can contribute to the selected objectives; and as a general rule, where there is no checkmark, these ESG tools do not contribute to the selected objectives.”

Negative screening

Professional investors (40% institutions³ and 42% fund selectors⁶ continue to rely on negative screening as part of their strategy, which reflects the large number who say they deploy ESG to better align assets with values. Negative screening, which excludes companies or industries deemed unethical or harmful to society from portfolio consideration, was the cornerstone of ESG’s predecessor, Socially Responsible Investing. But there are limitations to what it can accomplish.

Exclusions may signal good intentions, but the practice may not always deliver the intended results. In truth it can contribute to investment performance – positively or negatively – but the industry has found little evidence that it helps address societal problems or is effective in risk management.

Active ownership

Just over one-third of institutions³ (34%) and fund selectors⁶ (35%) also implement active ownership. In this, the process of leveraging their rights of ownership to influence corporate behavior, professional investors can find dual purpose. On one hand, it has the potential to influence performance on non-financial ESG factors, helping to set a course for more ethical business practices. On the other, it may also be an effective risk management tool and potentially enhance returns. In essence, the practice can contribute to performance, by ensuring that corporations are better managed for the long term and better positioned to withstand systemic transitions.

Impact investing

Most surprising are the 42% of fund selectors⁶ who say they are engaged in impact investing, a number that is considerably higher than their institutional counterparts³ (34%). It may be that selectors are deploying impact funds to meet customer demands, or in the case of family offices, directing assets to support specific client causes. Institutions are likely to consider it in terms of making direct investments in impact projects instead.

By design, impact strategies aim to achieve financial outperformance and/or contribute to solving societal challenges. In general, they can deliver financial performance if they are built on a strong conviction and narrative. They can also contribute to solving societal challenges if the investments finance activities that otherwise would not be financed.

Frequently, though, societal benefits are the exclusive focus. While this is a critical priority, organizers may forget that institutions also have to meet investment objectives. Seven in ten institutions³ say they would be more likely to invest in projects that fulfill sustainable development goals if the investment presented risk/return characteristics that are in line with their objectives.

How professionals say they are applying ESG

Sources: Natixis Investment Managers 2019,² 2020⁴ and 2021³ Global Institutional Outlooks and 2019,⁵ 20201¹ and 2021⁶ Global Fund Selector Outlooks

4 How do you measure ESG performance?

Of all the challenges professionals face with ESG, measurement may be the biggest. Even though institutions³ (79%) and fund selectors⁶ (83%) say it’s getting easier to benchmark, the jury is out as to whether they have the tools to measure ESG performance.

Both institutions³ (60%) and selectors⁶ (63%) say third-party ratings and awards make it easier to gauge non-financial performance. The industry has seen greater attention to ESG measurement with services from Sustainalytics,¹² MSCI¹³ and others for benchmarking individual issuers. These are complemented on the funds side with services like those from Morningstar¹⁴ and Barron’s.¹⁵ But professionals are finding that the choices outside of the ratings services are more limited.

Tools professionals say make it easier to measure non-financial ESG performance

Sources: Natixis Investment Managers, 2021 Global Institutional Outlook and 2021 Fund Selector Outlook

In seeking out the data they need, 38% of selectors⁶ and 29% of institutions³ also rely on company and issuer reports. But with a lack of standardized reporting on the corporate side, they may find information can be inconsistent from industry to industry. This makes it harder to set a clear basis for comparison. Beyond these reports, both say they rely on data from non-governmental organizations (NGOs) (28% for institutions³ and 22% for selectors⁶), about one-quarter rely on outsourced consultants, while others rely on news reports and regulatory filings.

Professionals also think asset managers need to do their part as well. Nine out of ten institutions say asset managers should have clear reporting on how they implement ESG. Another 57% think asset managers should be more proactive in developing ESG-labeled funds, while two-thirds also think asset managers should incorporate ESG factors regardless of labeling.³

If a lack of measurement tools challenges professional investors, lack of a common understanding could be the biggest hurdle for retail investors.

5 Do we share a common language on ESG?

Clearly, institutions and fund selectors are driving a big part of the ESG discussion, but that conversation is also playing out between individual investors and their advisors. Our data suggests that unfortunately, they may not always be speaking the same language.

Selectors note ESG efforts are driven by the demands of their end clients: individual investors.⁶ But when it comes to implementing ESG in portfolios, financial advisors and clients are not always on the same page. For example, our 2019 survey of individual investors found the number-one thing investors wanted from their relationship with advisors was to have them offer investments that match their personal values.¹⁶

With 47% asking for this, the issue ranks higher than having advisors clearly explain their fees (45%), listening to them (43%) and helping them manage volatility (42%).¹⁶ But one year later, less than one-third of financial advisors said their clients have been asking for ESG⁷ – even though 81% of investors want to align assets and values.¹⁶

Financial professionals and investors aren’t always on the same page about ESG

Sources: Natixis Investment Managers, 2020 Global Survey of Financial Professionals⁷ and 2019 Global Survey of Individual Investors¹⁶

Therein lies the challenge. Advisors cover a lot of ground in client relationships, and demand for ESG may be drowned out by the familiar requests. Retirement planning (59%), financial planning (50%) and tax-efficient investments (40%) all rank ahead of ESG in client demand, according to advisors.⁷ Getting a clearer understanding of client preferences may mean reading more between the lines.

Investors may see ESG in more holistic terms, rather than outright asking their advisors to include an ESG fund or two in their portfolio. For example, investors responding to our 2019 survey expressed clear expectations about active ownership.

Three-quarters (76%) expect their fund manager will look at more than the financial aspects of a company in their analysis. Two-thirds (68%) believe their mutual fund manager should be actively engaging with companies. More than half (53%) expect their fund manager to sell investments in companies with poor environmental records.¹⁶

Perhaps most telling of this sentiment is the 50% of investors who go far enough to say the best way to send a company a message is to sell its stock.¹⁶

Ultimately, questions and conversations about these and other issues could go a long way toward helping advisors to better understand what their clients mean by “personal values.” It’s important because clients are confused whether the values alignment is actually happening. When asked outright if they own ESG investments, 16% said they do, but 22% simply said “I don’t know.” ¹⁶

Placed at the intersection of clients who are demanding more ESG investments and the firms trying to deliver, financial advisors are uncertain about how it will all play out. Seven in ten say that with an increasing number of these strategies available, it is hard to know which ones may deliver on both investment performance and ESG performance.

Like institutional investors, they identify reporting as a critical factor for gaining buy-in on ESG. 73% say standardized reporting will increase ESG adoption, and 66% say it’s hard to know which measures of non-financial performance actually matters. When it comes down to it, 58% say they would implement more ESG strategies if there was an easier way to do it. ⁷

Maintaining the momentum

There’s no question that ESG received significant interest from all sides of the investment ecosystem in 2020 based on the survey data in this report. But those predicting an ESG bubble may not see the full picture. Is it possible that some of the companies that benefited from the focus on sustainability experienced unwarranted growth? Certainly. Is it possible there has been a rush in the industry to capitalize on a new investment trend? Maybe. But the underlying factors driving growth seem more likely to continue.

Regulators across the globe continue to press asset owners and asset managers to factor sustainability issues into their investments. Individuals continue to demonstrate increased demand for ESG based on a wide range of reasons. And we are seeing the investment industry respond.

Professional investors are clarifying their motives for implementing ESG. In many cases this is not a simple black and white decision: Organizationally, large numbers of institutions and wealth managers are trying to contribute to a better world – or at least trying to align their assets with their values. Financially, many are also looking to become better investors by integrating ESG into their investment process and actively engaging with the companies in which they invest.

In the end, as long as society faces environmental and social challenges and as long as the demand continues for greater transparency for businesses, the odds are good that investors will want these considerations factored into their portfolio.

Download the executive overview

2021 ESG Investor Insights Report Executive Overview

3.83 MB

Glossary of ESG Investing Terminology

ESG (environmental, social, governance) is widely used in the investment industry to describe three types of non-financial factors that may affect the financial performance of a company or a security:

Environmental may include factors related to renewable energy, lower carbon emissions, water management, pollution control and other ecological concerns.

Social considerations may relate to labour practices, human rights, corporate social responsibility, data protection, selling practices or corporate supply chains.

Governance issues can include the composition of boards of directors, corruption policies, auditing structure, executive pay or shareholder rights

Active ownership - involves entering into a dialogue with companies on ESG issues and exercising both ownership rights and voice to effect change.

Best-in-class selection - prefers companies with better prospects of or improving ESG performance relative to sector peers.

ESG integration - refers to strategies that integrate ESG factors into fundamental analysis to pursue alpha and manage risk, or may use sustainable themes to identify investment opportunities. Certain ESG strategies may also seek to exclude specific types of investments.

Exclusionary screening - refers to avoiding securities of companies or countries on the basis of traditional moral values and standards and norms.

Impact investing relates to strategies that may invest in companies/organizations with explicit intention to generate positive social or environmental impact as the primary objective, alongside financial return as the secondary objective.

Sustainable investments - ESG investment strategies aimed at generating strong performance through investments that focus on companies that are moving society towards a more sustainable future.

Thematic investing - refers to investing that is based on trends, such as social, industrial, and demographic trends.

Important Information: Sustainable investing focuses on investments in companies that relate to certain sustainable development themes and demonstrate adherence to environmental, social and governance (ESG) practices, therefore the Fund's universe of investments may be reduced. It may sell a security when it could be disadvantageous to do so or forgo opportunities in certain companies, industries, sectors or countries. This could have a negative impact on performance depending on whether such investments are in or out of favor.

^1 © 2021 Morningstar, Inc. Global Sustainable Fund Flows: Q4 2020 in Review. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; (3) does not constitute investment advice offered by Morningstar; and (4) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Use of information from Morningstar does not necessarily constitute agreement by Morningstar, Inc. of any investment philosophy or strategy presented in this publication. Reproduced with permission.

²Natixis Investment Managers, Global Survey of Institutional Investors (2019 Outlook) conducted by CoreData Research in October and November 2018. Survey included 500 institutional investors in 28 countries.

³Natixis Investment Managers, Global Survey of Institutional Investors (2021 Outlook) conducted by CoreData Research in October and November 2020. Survey included 500 institutional investors in 29 countries.

⁴ Natixis Investment Managers, Global Survey of Institutional Investors (2020 Outlook) conducted by CoreData Research in October and November 2019. Survey included 500 institutional investors in 29 countries.

⁵Natixis Investment Managers, Global Survey of Professional Fund Buyers (2019 Outlook) conducted by CoreData Research in October and November 2018. Survey included 200 respondents in 22 countries.

⁶ Natixis Investment Managers, Global Survey of Professional Fund Buyers (2021 Outlook) conducted by CoreData Research in November and December 2020. Survey included 400 respondents in 23 countries.

⁷Natixis Investment Managers, Global Survey of Financial Professionals, conducted by CoreData Research in March-April 2020. Survey included 2,700 financial professionals across 16 countries.

⁸ Natixis Investment Managers, Global Survey of Institutional Investors conducted by CoreData Research, December 2014. Survey included 642 institutional investors in 27 countries.

⁹ Natixis Investment Managers, Global Survey of Institutional Investors conducted by CoreData Research, October 2015. Survey included 660 institutional investors in 29 countries.

¹⁰ Natixis Investment Managers, Global Survey of Individual Investors conducted by CoreData Research, August 2018. Survey included 9,100 investors in 25 countries.

¹¹ Natixis Investment Managers, Global Survey of Professional Fund Buyers (2020 Outlook) conducted by CoreData Research in October and November 2019. Survey included 400 respondents in 23 countries.

¹² Sustainalytics is the leading independent global provider of ESG and corporate governance research and ratings to investors.

¹³ The MSCI ESG Universal Index Family is the latest in a suite of MSCI Indexes and tools designed to help institutional investors globally integrate ESG into their investment decision-making processes.

¹⁴ The Morningstar Sustainability Rating™ for funds allows investors to understand how the companies in their portfolios are managing their environmental, social, and governance – or ESG – risks relative to their peers. This rating is built to enable advisors and investors to directly compare companies across industries, and a refined design aims to make it easier to use as they make investment decisions.

¹⁵ Barron's Top 100 Most Sustainable U.S. Companies was compiled by Calvert Research and Management, based on hundreds of metrics that address environmental, social, and corporate governance, or ESG, factors.

¹⁶ Natixis Investment Managers, Global Survey of Individual Investors conducted by CoreData Research, February-March 2019. Survey included 9,100 investors from 25 countries.

The data shown represents the opinion of those surveyed, and may change based on market and other conditions. It should not be construed as investment advice.

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed are as of April 2021 and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary.

All investing involves risk, including the risk of loss. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.

Alpha is a measure of the difference between a portfolio's actual returns and its expected performance, given its level of systematic market risk. A positive alpha indicates outperformance and negative alpha indicates underperformance relative to the portfolio's level of systematic risk.

Diversification does not guarantee a profit or protect against a loss.

Sustainable investing focuses on investments in companies that relate to certain sustainable development themes and demonstrate adherence to environmental, social and governance (ESG) practices, therefore the Fund’s universe of investments may be reduced. It may sell a security when it could be disadvantageous to do so or forgo opportunities in certain companies, industries, sectors or countries. This could have a negative impact on performance depending on whether such investments are in or out of favor.

Natixis Distribution, L.P. is a limited purpose broker-dealer and the distributor of various registered investment companies for which advisory services are provided by affiliates of Natixis Investment Managers.

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