27% of investment professionals ignore ESG. Who are these crazy people? Don’t they know they are leaving return/alpha on the table? Breaking fiduciary duty law and giving active managers a bad name? Hush, Ben, hush hush.
Ben, if everyone looked at ESG information and properly assessed it, you’d have no competitive advantage. If everyone does something it becomes baked into consensus, right? But, it’s the right thing to do. Well, good job no one listens to you, eh?
What about all these academic papers suggesting ESG adds value, that active ownership and stewardship also increases stock returns and company fundamentals?
Ben, Ben, Ben… when was the last time anyone you knew actually read an academic paper outside the world of School? Read the whole paper, considered the evidence and then formed an opinion?
Oh good point.
Here’s the recent (July 2017) CFA survey (n=1,588) on ESG and here is the CFA ESG resource page. So who are these crazy 27% who do not consider ESG?
Even worse, of c. 70% who do consider ESG only 50% do it systematically. So really only 35% of investment professionals are examining ESG all the time, systematically.
Source: CFA Institute
The US number is 32% of investment professionals who ignore ESG.
Source: CFA institute
OK, so this is only one survey. But, it has strong agreement with this large academic survey from Amir Amel-Zadeh and George Serafeim (2017, Why and How Investors Use ESG Information: Evidence from a Global Survey). These authors write:
“Recent studies have documented that ESG information is associated with numerous economically meaningful effects. Specifically, ESG disclosures are associated with lower capital constraints (Cheng, Ioannou and Serafeim 2014), cost of capital (Dhaliwal et. al 2011), analyst forecast errors (Dhaliwal et. al 2012), and stock price movements around mandatory ESG disclosure regulations (Grewal, Riedl and Serafeim 2017). Moreover, industry-specific classifications of financial materiality of ESG information identify ESG information that is value relevant and predictive of firms’ future financial performance (Khan, Yoon and Serafeim 2016).”
The n=416 for the Amel-Zadeh paper.
The US = No ESG = 25% and the overall total = 18% so a little lower than the CFA, although the US number is close. So it does still suggest somewhere between 20% to 30% might be the right ball park.
Amir Amel-Zadeh and George Serafeim (2017)
I will leave you with this from Amel-Zadeh:
“The majority of the respondents suggests that ESG information is material to investment performance. However, which information is material likely varies systematically across countries (e.g. a country where water pollution is a more serious issue versus a country where corruption is a more serious issues), industries (e.g. an industry affected dramatically by climate change versus an industry affected by violations of human rights in the supply chain) and even firm strategies (e.g. firms that follow differentiation versus low price). For example, Khan et al. (2016) show that the vast majority of ESG data for any given industry is immaterial to investment performance and that the material information varies across industries within a sample of US stocks. Understanding how the materiality of ESG information varies across countries, industries and firm strategies therefore is of primary importance.”
This to my mind along with this study on the benefits of Active Ownership and ESG engagement and If one puts this work together with the work on the outperformance of Global Equity managers described here, one can start to build a defense of Active Management for global managers; where John Kay would argue Active Managers should compete on style and philosophy in any case.
If you'd like to feel inspired by commencement addresses and life lessons try: Neil Gaiman on making wonderful, fabulous, brilliant mistakes; or Nassim Taleb's commencement address; or JK Rowling on the benefits of failure. Or Charlie Munger on always inverting; Sheryl Sandberg on grief, resilience and gratitude or investor Ray Dalio on on Principles.
Cross fertilise. Read about the autistic mind here. On investing try a thought on stock valuations.