ESG Still Not a Priority for CIOs

Growing awareness of ESG is not yet reflected in investment decision-making, according to Hermes Investment Management.

Investors are increasingly aware of environmental, social, and governance (ESG) issues—but that doesn’t mean they’re changing their ways anytime soon.

A new survey by Hermes Investment Management found that 90% of respondents believed fund managers should price in corporate governance risks as a core part of their investment analysis.

Despite this show of ESG awareness, 47% still said pension funds should focus exclusively on maximizing retirement incomes—a goal the majority believed would not be met by focusing on ESG issues.

Just 46% believed ESG-focused investing would produce better long-term returns.

Additionally, while 79% considered significant ESG risks with financial implications as sufficient reasons to reject an otherwise attractive investment, 58% believed the number of opportunities rejected by pension schemes because of ESG will increase only slightly over the next five years.

“It is clear that ESG has become mainstream,” said Hermes Chief Executive Saker Nusseibeh. “However, the industry’s obsessive focus on measurement leads naturally to more short-term thinking and decisions that often miss the whole point of investment.”

The growing trend toward passive investing strategies may also mean that investors are less engaged in where money is actually going. According to the report, 61% of respondents believed large shareholders are likely to become unaware of the companies they invest in.

“By moving toward index-tracking strategies, investors are giving up their voting rights, and thus, their influence,” Nusseibeh said.

The CEO added that even though institutional investors are beginning to talk the ESG talk, there is a “long road to walk before we see real change.”

“Today’s siloed and short-term investment approach is the antithesis of responsible capitalism,” Nusseibeh said. “Change is necessary, if we are to ensure today’s savers and their children will be able to enjoy a fruitful world in the future.”

Related: Why Your Kids Won’t Know What ‘ESG’ Means & The Multi-Trillion Dollar Impact of Climate Change (and Why ESG Isn’t Enough)