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Institutional investors say COVID-19 pushed ESG to forefront

A European survey shows ESG criteria, especially social factors, hold greater sway in investment decisions, but significant barriers remain.

A growing number of investors in Europe say they are taking environmental, social, and governance (ESG) considerations into account in all or part of their portfolios, especially social impacts, as a result of the COVID-19 crisis, citing intentions to positively impact society and the environment, reduce risks, and meet stakeholder needs.

The survey of 96 institutional investors and 33 intermediary distributors in the UK, France, Germany, Italy, the Netherlands, and Nordic countries by BNP Paribas Asset Management found that almost a quarter of respondents (23%) reported a greater focus on ESG criteria in their investment decisions.

Environmental and governance factors lead as the most importance ESG elements, but the pandemic has caused a major shift in investors’ approach to social issues, with 70% of respondents expecting social considerations in investments to become very or extremely important going forward.

“The COVID-19 crisis has clearly prompted a shift in investor perception of social factors, which are now widely seen as having a critical and positive impact on long-term value creation and risk mitigation,” Frédéric Janbon, CEO of BNP Paribas Asset Management, said in a press release.

He added that the global health crisis has highlighted that the way companies treat employees or address inequalities is linked to their long-term sustainability.

While investors expect socially responsible investments to yield positive returns, most (79%) say the impact will only be seen in the long term and that short-term impacts on investment performance are less significant.

The report added that the most important social considerations affecting investment decisions are labour standards (38%), excluding harmful investments (31%), human capital management (23%), and gender equality (22%). Community involvement (11%) was ranked as less important.

Lack of standard metrics and data availability creates barriers

Despite the encouraging signals, the report found that social indicators can seem less tangible and measurable with standards varying by region, making it difficult to make side-by-side comparisons of companies and potential investments.

The numerous ESG reporting standards and frameworks available in the market — GRI, IIRC, SASB, TCFD, UNGC — have long confused companies and users of such reports, with many referring to them as an alphabet soup of standards that are not well harmonised.

However, a recent collaboration between the Sustainability Accounting Standards Board (SASB) and Global Reporting Initiative (GRI) holds promise to remove some of the confusion and frustration.

“While social factors are an extremely important component of companies’ ESG scores, they have often been perceived as less prominent,” Jane Ambachtsheer, global head of sustainability at BNP Paribas Asset Management, said in the same press release.

To overcome the barrier, Ambachtsheer suggested that investors should continue to focus on data and research in a range of social indicators including gender diversity and labour standards.

Janbon said, “We encourage companies to evolve and improve their social behaviour, thereby reducing risk and enhancing the sustainable returns that we can deliver to our clients.”

Alexis See Tho (Alexis.SeeTho@aicpa-cima.com) is an FM magazine associate editor.