The Markets October 9, 2018

Views of ESG Investing Changing Among Institutional Investors

The percentage of U.S. institutional investors that reject ESG outright shrank dramatically year over year, from 51% to 34%, according to RBC Global Asset Management’s third annual Responsible Investing Survey.

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Institutional investors in the U.S. continue to view the application of environmental, social and governance (ESG) principles in investing more cautiously than other countries, but the percentage that reject ESG outright shrank dramatically year over year, from 51% to 34%, according to RBC Global Asset Management’s third annual Responsible Investing Survey.

Forty-three percent of institutional investors incorporate environmental, social and governance (ESG) factors into their investing, up from 22% in 2013, according to a report from Callan.

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RBC’s global survey found a dramatic shift in attitudes toward ESG analysis is visible among U.S. institutional investors, as 24% said they believe an ESG-integrated portfolio would outperform its counterpart, nearly five times the percentage in last year’s survey. About 18% of U.S. respondents still said they believe the ESG-integrated portfolio would perform worse, but that negative sentiment is down from 26% in the 2017 survey.

One of the key issues in the responsible investing debate is whether ESG analysis should be considered a source of alpha, and U.S. investors reported sharply higher confidence in 2018, with 39% now saying ESG analysis generates alpha, more than double last year’s 17%. As the U.S. has been one of the biggest holdouts against wider adoption of ESG principles, this increase is a meaningful indication that opposition is eroding, RBC contends.

In 2017, just 28% of respondents said they thought ESG could be a risk mitigator; this year, that number climbed to 54%. The number of U.S. respondents who said otherwise nearly halved: to 24% this year from 50% last year.

The 2018 survey also shows a turnaround regarding the question of fiduciary duty. More than half of all respondents that incorporate ESG factors into their investment approach now say that doing so is part of their fiduciary duty, double last year’s level.

Equities have long been the primary focus of ESG analysis and investing and that remains true among many institutional investors according to this year’s survey: However, ESG analysis is moving beyond equities. Alternatives, which ranked fifth overall in ESG integration, came in third in the U.S. behind equity and fixed income and ahead of infrastructure and real estate. Thirty-percent in the U.S. said it is important to incorporate ESG into fixed-income. Asked directly whether they incorporate ESG into fixed-income management, 52% of U.S. investors that use ESG said yes.

As responsible investing has developed, the discussion about how to apply the principles in a portfolio has evolved from negative screens (often excluding so-called ‘sin’ stocks such as alcohol, tobacco and firearms companies) to a range of approaches that are more nuanced and more multifaceted. Discussions about exclusion have in many cases evolved and now encompass a range of different approaches to responsible investing. When RBC asked if respondents required asset managers to apply socially responsible screens to portfolios, 76% of all respondents said no. Resistance to such screens was higher in North America and the UK, where no more than 20% of respondents use screens.

“As industry acceptance of ESG integration has accelerated and becomes mainstream, there will be greater focus on ESG-related investment research and its application in the portfolio management process,” says Habib Subjally, senior portfolio manager and head global equities at RBC Global Asset Management (UK) Limited. “And as the demand for responsible investment solutions grows, asset managers and consultants will increasingly be called upon to offer guidance to their clients about responsible investing options that support their long-term financial goals.”
Data & Research October 9, 2018

Wealthy Investors Question Adviser Expertise

The Spectrem study found 59% of investors said their adviser understands Social Security benefits, while 47% said their adviser is knowledgeable about Medicare.  

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Identifying health care and living costs are only a fraction of the concerns investors face as retirement looms near. How to pay for them is another ballpark.

 

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A recent study from Spectrem, “The Convergence of Health and Wealth,” examined American life expectancies and costs associated with it, finding that as life longevity among American workers increases, so does the price in health care services—hundreds of thousands of dollars or more. Participants in the survey are wealthy investors, with a household net worth between $100,000 and $25 million (not including primary residences), and 51% of non-retired investors expect medical fees to be their largest expense in retirement, according to the study. Twenty-two percent expect housing bills to be their largest expense, and nearly three out of four investors (73%) believe changes in their health or home life will be their most significant cost in retirement.

 

Spectrem also found wealthy investors lack some faith in their advisers. Fifty-nine percent said their adviser is knowledgeable in Social Security benefits, while 47% said their adviser sufficiently understands Medicare benefits. The news isn’t ideal for the 17% of working investors surveyed, who expect Social Security to be their primary source of funding health care expenses, or for the 25% who expect this to be Medicare. Other investors said pensions (18%) and savings and investments distributions (28%) will provide health care funding.

 

However, working investors are taking an initiative to learn about their retirement benefits. Based on a 100-point scale, survey respondents ranked 67.22 for understanding Social Security benefits, 59.09 for Medicare benefits, and 49.77 for assisted living options.

 

“As life spans increase, investors will require more money to remain financially secure through the end of their lives,” says Spectrem President George Walper, Jr. “The most daunting uncertainty they face is the cost of health care, which can be extraordinarily difficult to predict. Retirement living is another issue, as investors are uncertain where to turn for information on assisted living or continual care options. And, while one of their sources of information is their financial adviser, investors are not convinced their adviser has sufficient knowledge to provide sound advice. Advisers would be well-served to demonstrate their expertise in assisting older investors with this type of planning.” 

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