Investing according to environmental, social and governance (ESG) criteria is still met with a certain restraint, or even doubts fueled by an all-too-often erroneous perception.
The Co-operators insurance company released the results of a survey earlier this month. We learn that the vast majority of respondents recognize the importance of sustainable development (73%) and the need to support companies that make efforts in this regard (62%). However, the perceived additional cost represents an increasingly important dissuasive factor. “More than seven in ten Canadians believe that products and services from sustainable companies tend to cost more. » If so, that they must “sacrifice returns or pay more to make their investment portfolios “green””.
Solely on the question of performance, on a base of 100 set in August 2008, the MSCI Canada ESG Leaders index exceeded 243 points last August, compared to 225 for the MSCI Canada index. In terms of relative performance in Canadian dollars, we are talking about a multiplication by 2.44 versus 2.25, a difference of 8%. Over this 15-year horizon, we can observe a slight drop favoring the ESG index compared to the reference one from November 2014, which amplified in February 2016, to then see the evolution of the two indices come closer together. in 2022 and 2023.
It is also important to remember that minimizing risk is the primary reason why companies consider ESG factors, followed by improving returns over time and meeting fiduciary obligations, reads a summary report from the Association for Responsible Investment (AIR). Which also concerns investors.
When respondents to a survey on responsible investment trends were asked to rank the top three reasons they consider ESG factors in their investment decisions, minimizing risk was the top one for 35%. between them, or was among the three main ones for 74% of respondents. Some 61% of respondents ranked improving yields in their top three reasons. “By combining risk minimization and improved returns, responsible investors emphasize the ability to generate better risk-adjusted returns as a key motivation for considering ESG factors in their investment decisions,” summarizes AIR.
Note that the 2023 survey also highlights a notable increase in the proportion of respondents who rank the search for a social or environmental impact among their three main motivations, which increased from 20% in 2022 to 31% in 2023.
The attraction is verified in the statistics on the evolution of assets under management. In fact, we can observe a slight decline, of 3%, in these assets under management of Canadian responsible investment between 2021 and 2022. But 2022 was a year of widespread fall in returns on both stocks and bonds under the influence of the surge in inflation and the muscular rise in interest rates against the backdrop of rising geopolitical tensions and the fear of a recession. Despite this general decline, it still appears that the proportion of assets managed under responsible investment criteria increased from 47% to 49% between these two years, indicates the AIR.
Cost-effective sustainability
Remember that it is now recognized and repeatedly demonstrated that there is a neutral or positive correlation between ESG factors and performance. And a strongly negative correlation between the performance of companies according to these ESG criteria and the volatility of their stock market securities, responsible investment being associated with lower risk. Among other things, a study published by MSCI using data on more than 1,600 stocks between 2007 and 2017 “revealed that companies that adopt good ESG practices tend to display higher profitability and report a higher dividend yield , while presenting lower residual risks, in addition to lower systemic volatility and a higher valuation,” we have already written.
But many irritants
That said, there are still many irritants to overcome. The three main obstacles to the growth of responsible investment mentioned remain, in order, greenwashing, the absence of standardized disclosure frameworks or standards and the lack of reliable data. In fact, just six in ten asset managers say they feel more confident about the overall quality of ESG reporting compared to last year. So there is room for improvement.
Especially since, on the contrary, the document 2024 Canadian Perspectives on ESG Reportingpublished this week by the PwC Canada firm, tells us that, according to information published by more than 250 of the largest Canadian companies in terms of market capitalization, more than four out of five of these companies do not use quantifiable financial data on climate change, almost three-quarters do not fully explain how they analyze ESG issues and integrate them into their long-term strategy and 62% do not certify any of their ESG indicators.