Over the course of the past year, Aon has noted a dramatic upsurge in the number of institutional clients who are exploring or implementing responsible investing (“RI”) initiatives. Just a few years ago, institutional investors with RI programs were few and far between. Today, we have many clients in various stages of RI program development, from educational initiatives for investment staff and boards to full on deployment of RI policies and procedures. To stay current with the evolving landscape, we launched a global responsible investment survey to capture current attitudes towards and developments in investors’ RI thinking, and we’re delighted to share those results with you in this paper.
Aon believes that there are a few factors driving this increased interest in RI, including:
- Regulatory changes across geographies
- Demographic shifts, including workforce shifts to millennials and generational wealth transfers to women
- Identification of non-financial risk factors and further quantification of materiality through expanding and higher quality environmental, social and governance (“ESG”) data
The regulatory changes are perhaps the easiest to identify and quantify. There have been dramatic changes across the RI regulatory regime in almost every geography in recent months and years. The United Nations Principles for Responsible Investing (“UN PRI”) tracks the number of policy initiatives related to RI and Environmental, Social and Governance factors across the top 50 countries (by GDP). As you can see, the number of policy initiatives has increased exponentially just in the last five to ten years alone.
In addition, the demographics of the workforce are also experiencing a shift. Millennials have now eclipsed Baby Boomers as the dominant group in the workforce.2 What’s more, 71 percent of these workers are already saving for retirement and 39 percent are saving 10 percent or more of their income.3 This demographic shift is a key factor in the rise of responsible investing, as a higher percentage of millennials (some surveys show as high as 86 percent4 ) are interested in responsible investing. Likewise, women, who now control more than 50% of the investable wealth in the US5 and are an increasing financial force in other geographies, are also interested in “doing good and doing well.” Some studies show that up to 80% or more of women are interested in responsible investing.6 Together, these two demographic groups are likely responsible for the doubling of ESG assets since 2014.7 Regardless of age or gender, affluent investors are flocking to responsible investing. In a 2016 survey by TIAA-CREF, 77 percent of wealthy investors wanted their investment assets to positively impact society.8
As regulatory requirements and investor interest has accelerated, so too has the amount of information available on the risks and rewards associated with responsible investment. For example, the largest meta-study of ESG data, conducted by Gunnar Friede, Timo Busch & Alexander Bassen (2015) attempted to amass ESG data and financial performance based on aggregated evidence from more than 2,000 empirical studies conducted between 1970 and 2015. This study concludes that, after a review of roughly 2,200 individual studies, “the business case for ESG investing is empirically very well founded [and] roughly 90 percent of studies find a nonnegative ESG–CFP [corporate financial performance] relation.”9
Furthermore, Bank of America Merrill Lynch studied the ESG scores of companies that declared bankruptcy between 2008 and 2016 and found that “an investor who held stocks with above average-ranks on both Environmental and Social scores would have avoided 15 of the 17 bankruptcies we have seen since 2008.”10 Meanwhile, Hermes attempted to quantify the relationship between ESG Score (QESG) and credit ratings in a 2017 paper, concluding that “companies with the lowest QESG Scores tend to have the widest [credit default swap] spreads and broadest distributions of annual CDS spreads…[and]credit ratings do not perfectly accurately reflect ESG risks and thereby do not serve as sufficient proxy for ESG risk.”11 And finally, data provider MSCI examined volatility and risk within an ESG integration framework in 2017. Examining both systematic and idiosyncratic risk (the market risk of an investment and the specific risks attributable to a company or sector), they found that companies with high or upgraded ESG ratings generally improved in both. For example, companies that saw an ESG rating upgrade generally exhibited a decrease in systemic volatility, as well as decrease in the cost of capital.12
Whatever their reason for investigating responsible investing, it’s undeniable that at least retail investors have been investing in droves. Institutional investors have been a bit slower to adopt wide-reaching RI policies and procedures, but, based on the results of Aon’s inaugural responsible investing survey, it appears that tide may be turning, particular for investors in the EU/Continental Europe and in the UK. North American investors may currently lag their European counterparts, but the question remains: for how long?
Aon’s Global perspectives on responsible investing aims to answer that, and other questions by looking into the RI behavior of institutional investors globally to determine current RI practices, obstacles to the implementation of responsible investing initiatives, and future goals for responsible investing.
To learn more, download the full survey findings above.
1 United Nations Principles for Responsible Investment Information Accessed May 2018 https://www.unpri.org/policy-and-regulation/mapping-responsible-investment-policy/208.article
2 Inside Philanthropy March 29, 2018 https://www.insidephilanthropy.com/home/2018/3/29/we-want-change-socially-conscious-employees-aredriving-a-paradigm-shift-in-corporate-giving
3 USA Today April 3, 2018 https://www.usatoday.com/story/money/personalfinance/2018/04/03/millennials-are-saving-well-but-theyre-investing-theirmoney-all-wrong/33472793/
4 Advisor Hub June 1, 2017 https://advisorhub.com/millennials-demand-socially-responsible-investments/
5 Investment News December 2, 2017 http://www.investmentnews.com/article/20171202/FREE/171209991/esg-funds-boosted-by-women-andmillennial-investors
8 Financial Advisor Magazine May 31, 2016 https://www.fa-mag.com/news/advisors-lack-sri-knowledge-27175.html
9 Journal of Sustainable Finance and Investment, Volume 5, 2015, Issue 4 Pages 210–233 http://dx.doi.org/10.1080/20430795.2015.1118917
10 Bank of America Merrill Lynch Information accessed April 2018 https://www.bofaml.com/content/dam/boamlimages/documents/articles/ID17_0028/ equitystrategyfocuspoint_esg.pdf
11 Hermes Investments Management Q2 2017 https://www.hermes-investment.com/ukw/wp-content/uploads/sites/80/2017/04/Hermes-Credit-ESGPaper-April-2017.pdf
12 MSCI ESG Research LLC November 2017 https://www.msci.com/documents/10199/03d6faef-2394-44e9-a119-4ca130909226
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