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Climate change trumps diversity and inclusion in institutional investor ESG considerations, finds Procensus survey

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Institutional investors are significantly further ahead when it comes to integrating climate change in their investment decisions than other ESG issues such as diversity and inclusion, according to a newly released report.

Procensus conducted a series of surveys with institutional investors from Europe, US, and Asia with an average combined AUM of USD10-15 trillion per poll.

The survey finds that the majority of investors, 70 per cent, believe that ESG will gain more weight in their investment strategies globally in 2021.

The top three ESG themes investors expected to focus on this year were climate change and carbon footprint; diversity and inclusion; and supply chain resiliency. 

Investors were particularly active when it came to their net-zero carbon emissions goals, with three quarters of survey respondents saying that they “significantly incorporate” net-zero considerations into their investment decisions. 

Procensus found that investors believe US, European and Chinese governments will modestly accelerate the timetables for their net-zero commitments, although China was perceived as the least certain to do so. In April, the UK government sped up its timetable for cutting carbon emissions, targeting a 78 per cent reduction by 2035. 

Companies are also setting net zero targets. A recent study by Transition Pathway Initiative finds that the number of companies setting “credible net-zero targets” has more than doubled in the past year. 

However, only a quarter of investors surveyed by Procensus said they were confident that corporates will, in general, deliver on their 2050 net-zero commitments. 

Enthusiasm for another ESG issue, diversity and inclusion, lagged behind. The push for greater diversity and inclusion issues has accelerated over the past year, as the global pandemic deepened gender and ethnic inequalities through job losses that have disproportionately affected certain groups. 

On average, respondents to the Procensus survey estimated that only 30 per cent of investors cared enough about diversity and inclusion factors to integrate them into their investment decisions.

“ESG investing is growing exponentially, but little is known about what investors truly care about and how it is changing,” says Alastair Walmsley, CEO of Procensus. 

“Investor engagement with diversity considerations in the context of investment portfolios, across all fund managers, is significantly lower compared to climate change.”

The survey found that investors believe an active strategy around diversity and inclusion adds value to a potential investment. Respondents were willing to pay an average valuation premium of 0.7x PE (price to earnings ratio) for a company with best-in-class diversity and inclusion strategy executed well, compared to one with no strategy at all.

When measuring corporate diversity and inclusion efforts, investors put the most store by leadership team diversity, board diversity, and pay gaps. 

Most investors, 52 per cent, favoured voluntary adoption of diversity and inclusion targets, as opposed to mandatory approaches, which were favoured by 27 per cent.

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