Investors abandon principles as low interest rates put pressure on returns


A survey of institutional investors found that 60 per cent believe that environmental, social and corporate governance (ESG) risks justify rejecting an otherwise attractive investment – down from 67 per cent a year ago, The Telegraph reports.

Eight in 10 also rejected the idea that socially responsible investment makes institutions less susceptible to market volatility, while the proportion who believe corporate governance risks should be priced into investment decisions slipped a touch on the year.

Hermes has promoted itself as a leader in the movement for sustainable investment, an idea which had been gaining ground, but it appears much of the rest of the market is going off the idea, hinting that the trend may turn out to be a fad.

“Dwindling income streams and escalating volatility may have caused an increasing amount of normally ethically-minded investors to eschew principles of responsible investing and adopt an investment strategy based on short-termism,” said Hermes’ chief executive Saker Nusseibeh.

“What we are seeing are hard-wired psychological responses to meeting volatility event by event, and a relentless focus on short-term financial outcomes.”

Environmental investments had been gaining popularity alongside political initiatives to cut greenhouse gas emissions, as well as technological progress to create more cost-effective ways of generating energy cleanly.

Meanwhile, corporate governance concerns had climbed up the agenda as scandals and bad publicity over poor behaviour, in sectors from banking to automotive manufacturing to retail, hit companies reputations and financial returns.

But the study seems to show those interests fading in the face of a tougher underlying market.

“Investors are not only failing to recognise the long-term and profound implications of their decision making, but also that ESG considerations are still very much compartmentalised rather than being included in core economic-based decisions,” said Mr Nusseibeh.

“We believe this to be fundamentally wrong, not least because a truly long-term view, i.e. investing with conviction in good companies and assets, gives a compass with which to navigate choppy market waters.”

Although the survey shows some fall in the level of interest in social responsibility, Hermes is optimistic that the topic is higher up the list of investors’ longer-term priorities.

The study found that 73.1 per cent of institutional investors believe pension funds – which have the most long-term horizons – are increasingly likely to reject schemes which they believe have environmental, social or governance risks.

At the same time 55.4 per cent consider it to be important to monitor those concerns in firms’ supply chains too.

Taxes are an increasingly important area because of the publicity that avoidance and evasion attract – 47.7 per cent said they would not expect to keep investing in firms which have been the focus of adverse publicity relating to their tax payments.