hand painting symbols of alternative energy sources in green

Resistance to responsible investing (RI) is quickly diminishing, according to the results of global survey of institutional investors published Tuesday by Toronto-based RBC Global Asset Management Inc. (RBCGAM).

In Responsible Investing: Charting a Sustainable Advantage, the majority of respondents (72%) say they incorporate environmental, social, and governance (ESG) factors into their investment approaches, up from 66% last year. The percentage of respondents who don’t adopt ESG principles (28%), is down from 33% last year.

Jason Milne, VP of corporate governance and responsible investing at RBCGAM, says this demonstrates that ESG has become part of “the mainstream of the investment process.”

“These [ESG] issues are material. They have the potential to impact the returns on portfolios, so if you’re not looking at ESG issues, you’re not looking at the whole risk picture of a portfolio. So therefore, you’ll underperform,” Milne says. “It’s a way to enhance those risk-adjusted returns over the long term.”

According to the survey, over half of respondents (54%) view addressing ESG factors as part of their fiduciary responsibility, more than double the number in 2017.

“We’ve sort of seen an evolution from, you know, is it a violation of your fiduciary responsibility to consider non-financial factors like environmental, social and corporate governance issues? Where now, with what we’re seeing in this year’s survey is, really, it’s part of your fiduciary responsibility,” says Milne.

There were some interesting divergences in the survey results between the U.S. (where investors can still be hesitant to adopt RI principles), and the rest of the world. Even though they can still be comparatively reticent, the percentage of American survey respondents who rejected ESG outright was significantly reduced year over year, from 51% to 34%.

In Canada, noticeably fewer respondents were willing to consider outright divestment from fossil fuels, favoring a shareholder-engagement approach, which Milne says can often be more effective.

“If you have concerns around ESG issues, if you sit down with the company and you explain why you’re concerned about these issues and how you see them impacting the performance of the company, it’s certainly our experience that you can have a real and material impact on the practices of that company,” he says. “It’s a very blunt signal when you sell your position. You’re not actually sending a direct signal to the company, you’re not actually sitting down with them and explaining why you’re selling.”

Retail advisors would do well to pay attention to ESG and RI approaches, Milne says, as being able to answer client questions and speak knowledgeably about the subject can give them an advantage in an increasingly competitive marketplace.

“Just in terms of branding, if you can talk about these issues — even if the client doesn’t decide to invest in a socially responsible way — the fact that you can talk about them, I think demonstrates to the client that you bring a certain amount of quality or knowledge to that relationship, that other advisors may not,” he says. “I think it’s a great way to demonstrate a value-add for the client that other advisors may not be providing.”

“What we’re seeing is also a demographic shift, and these issues are very important to millennials and to women,” Milne adds. For many advisors, these are growth markets, “so having the ability to answer ESG-related questions … will allow you to either hang on to the money you’ve got, or to grow that client base.”