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Ninety One Survey Finds European Fund Industry Overly Reliant on ESG Scores

Ninety One has released the results of an ESG-focused survey featuring insights from attendees at FundForum, one of the largest events gathering investment professionals in Europe. The survey was conducted in person between 10-13 May 2022.

Findings revealed that most respondents (88 percent) are using third-party ESG ratings to support investment decisions or, as part of their investment process. An overwhelming majority (92 percent) said they expect to increase their use of ESG ratings in the future.

These findings reinforce Ninety One’s belief that the investment industry relies too heavily on ESG ratings. Ratings cannot provide a full view into how a company manages its externalities both positive and negative.

Externalities such as a company’s impact on the environment (natural capital), interaction with the societies it operates in (social capital) and the potential of employees (human capital) will increasingly influence valuations. Without this understanding, investors are overlooking companies that are making the right sustainable choices.

Deirdre Cooper, Co-Head of Thematic Equities and Co Portfolio Manager, Global Environment:  “We believe optimising ESG ratings will not generate long-term portfolio outperformance. Findings from this survey underscore the need for investment managers to change the way their investment approach works: that involves analysing not just the returns to their financial shareholders, but the returns to all stakeholders.

“We challenge the industry to put more effort into building sustainable investment frameworks and move beyond the numbers to drive real change as the industry continues to evolve.”

The survey further revealed that the majority of respondents (68 percent) currently have, or plan to have, a sustainable investment allocation to emerging markets equities.

“The fact that survey respondents are looking to emerging market equities is encouraging. We firmly believe that emerging markets will determine the world’s ability to reach net zero. Currently, 80 percent of global financial assets are in developed countries and 88 percent of ESG/sustainable investment funds are global or developed market-focused. In contrast, 70 percent of the required SDG and Paris Agreement capital needs to be directed towards developing countries,” said Juliana Hansveden, Portfolio Manager, Emerging Markets Sustainable Equity.

“It has been seven years since the Paris Agreement was signed and the UN SDGs were adopted. However, we still have a significant funding gap to bridge. This responsibility is shared by the investment industry.”

The survey also explored respondents’ perspectives on the composition of investment teams, finding that most respondents (81 percent) consider the diversity of investment teams when choosing a fund manager. Similarly, when investing in companies, those with diverse and inclusive cultures can generate better outcomes for all stakeholders.

Stephanie Niven, Portfolio Manager, Global Sustainable Equity: “We are living in a world of rapid change where inclusive diversity is increasingly important to making better decisions. While there is more work to be done, these results indicate that people are recognising the significant positive potential in human capital. We need to think beyond the obvious and evolve sustainable investing to capture what really matters to creating sustainable value creation for all.”

The survey comprised responses from 130 fund management professionals, including fund managers, intermediaries, asset owners, consultants, and those in the distribution and asset servicing industries. FundForum was held in person in Monaco on 10-13 May 2022. Ninety One partnered with FundForum to carbon offset the event, making the conference carbon neutral. A second release detailing the rest of the findings will be shared in the coming weeks.

 

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