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European investors prefer excluding unsustainable firms – Novethic

Company engagement comes a close second

European investors are increasingly relying on exclusion to put pressure on companies with poor environmental, social and governance (ESG) practices, according to a new survey by Novethic, the French sustainability research firm.

For the survey, 115 asset owners in 11 European countries were queried. They manage around €4.5bn in assets (link).

Novethic found that 57% of these investors excluded firms that ranked poorly on ESG – up from 41% a year ago. Engagement was the second-most preferred method, with 54% saying they used it against 36% a year earlier.

Novethic noted that reliance on both strategies was greatest in Scandinavia, with 94% of investors there saying they preferred them. In the UK, by contrast, the use of exclusion was the lowest in Europe (18% of investors). Another 37% of the investors said they employed a best-in-class approach, up from 24% a year ago. Reliance on this strategy was greatest among German investors (67%).

Yet the survey also showed that fewer investors were integrating ESG criteria into the investment process. Only 27% said they did so currently, down from 37% a year ago. Said Novethic: “This corroborates the idea that asset owners are seeking more concrete approaches to sustainability rather than settling for broader techniques with benefits that are difficult to measure.”Firms making controversial weapons such as cluster bombs topped the investors’ exclusion lists, with 72% telling Novethic they avoided them. They were followed by exclusions based on human rights (53% of investors), working conditions (47%), environmental damage (45%) and corruption (43%).

“Asset owners are seeking more concrete approaches to sustainability”

The survey also showed that 40% of investors demanded that their external managers comply with their list of exclusions. Another 34% required ESG reporting from the managers. But only 21% said membership of the UN-backed Principles of Responsible Investment (PRI) was a condition that managers had to fulfil before they would invest with them.

Two-thirds of the investors, most of whom were in Scandinavia and the UK, also said that the managers should not raise their fees if they invest along ESG lines. Conversely, 25% of the investors, particularly in France and Germany, said higher fees for the approach could be justified.

Hugh Wheelan, managing editor of Responsible Investor, helped compile the survey.