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Institutional investors believe ESG factors are more important than financial metrics when evaluating a company’s long-term attractiveness

  • 88% of institutional investors believe ESG factors are more important than financial metrics to evaluate long-term attractiveness of a company

  • 79% believe investors should avoid companies with ESG failings, even if they could offer attractive short-term returns

  • 85% of investors describe investor engagement through stewardship as effective

  • 78% of investors believe investor engagement has become more effective over the last three years

ESG factors have grown in importance to institutional investors, according to a survey of 100 UK-based institutional investors by Federated Hermes, a global leader in active, responsible investing.

The inaugural ‘Responsible Capitalism’ survey, conducted in September 2021, found that for most institutional investors (88%), ESG factors play a central role when making long-term investment decisions and are seen as more important than traditional financial metrics.

The research also highlighted investors understand the positive impact investing in companies that embed ESG principles into their practices can have on business performance. Companies that focus on ESG issues will outperform their competitors (83%), produce better long-term returns and reduce investment risk (80%), think most institutional investors.

Furthermore, 79% of institutional investors believe companies with ESG failings should be avoided – even if short-term returns look attractive.

Looking back at the past year, investors believe social, environmental and corporate governance factors carry more weight than they did 12 months ago, illustrating how these have become far more central to their investment approach.

  • 78% say social factors (e.g. diversity and inclusion policies, healthy working conditions) carry more weight than a year ago;

  • 78% also say environmental factors (e.g. using energy efficiently, managing waste responsibly) carry more weight than a year ago;

  • 69% say corporate governance risks (e.g. tax strategy, executive compensation) carry more weight than a year ago.

While ESG is increasingly important, it is just one part of a bigger picture for responsible investors. The survey found most investors (85%) see engagement with companies through stewardship as an effective tool for achieving investment objectives with an ESG lens. 78% believe engagement activity has become more effective over the past three years.

Saker Nusseibeh, CEO of the international business of Federated Hermes, commented:

As we approach COP26, the need for the investment management industry to play its part in efforts to tackle climate change globally has never been more urgent. The results of our survey of major UK institutional investors show that for these investors, an approach anchored in ESG is not a ‘nice to have’ but core to their decision-making process. It backs up our long-held view that, over the long term, ESG factors are financial factors when it comes to investing.”

“At Federated Hermes, we firmly believe active engagement with companies through stewardship is the most effective means of driving positive change. It is encouraging that most institutional investors agree, showing we have moved beyond the blunt instrument of divestment.

“Our survey shows institutional investors see engagement as growing in effectiveness. Successes of the past year have clearly triggered a huge shift in investor sentiment. The momentum is now clearly with those who favour long-term financial sustainability over short-term gains.

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