Latest SMBC Nikko Capital Markets Global Investor Survey focuses on ESG

Since 2020, SMBC Nikko Capital Markets Ltd has held regular global investor sentiment surveys, asking clients around the world about their views on financial markets, risks and major market drivers. Our fourth SMBC Nikko Global Fixed Income Survey focused exclusively on ESG – one of the most important topics emerging in recent years that is rapidly becoming a major force for transformation in finance, and is already changing the global investment landscape.

To understand how our investors across different regions are addressing ESG transition, we asked our clients about the ways they incorporate ESG in their firms. Our survey delved into the reasons for ESG integration, key focus areas and challenges, our clients’ approach to different sectors in light of ESG considerations, ESG products in which they invest and the third-party data providers they use.

We received responses from more than 130 investors including asset managers, hedge funds, insurance companies - both investment-grade and high-yield. Our clients surveyed span the USA, Europe, Middle East, Asia Pacific (including Hong Kong, Singapore and Taiwan) and Japan. The survey was conducted between 8 March and 20 March 2021. The results were very informative and the regional differences insightful.

Although depth and method of ESG implementation vary across regions, a majority of buy-side clients now include ESG as part of their investment policies (only 6% of investors we interviewed noted that ESG analysis is “not yet part of their formal investment policies”). Europe is the most advanced region with the largest depth and breadth of ESG implementation, followed by the USA, Asia, Middle East and Japan.

Although there are big differences between individual responses, the main methods of ESG implementation are:

-       broad inclusion of ESG analysis in internal credit/risk ratings, which are used in decision-making process (noted by more than half of respondents)

-       offer of specialised fixed income funds and products labelled as ESG/sustainability (mentioned by 15% of respondents)

-       assigning and disclosing of ESG rankings at least for some of their portfolios (13% of respondents)

-       keeping ESG analysis separate from a regular credit analysis; the ESG analyst has an important voice in the final investment decision (9% of respondents).

The main reasons for investors to be involved in ESG are demand from retail clients or to reduce risks (both factors noted by more than half of respondents). These are followed by reasons like “ESG offering an opportunity to introduce new products” (20% of respondents), “push from local regulations and government programmes” (17% of respondents), and “supply and wider availability of ESG products” (11% of respondents). 

While most respondents noted that all elements of ESG are equally important, the environmental factor (the ‘E’) seems to receive more “attention” in financial markets and contains more monetary value, while the social (‘S’) factor seems the most neglected. Among investors assigning more importance to one element of ESG, the environmental element received the highest importance from one fifth of respondents, closely followed by governance (‘G’). The social element was the least likely to be chosen as the most important element, trailing far behind (mentioned by only 4% of respondents).  

Green Bonds, Sustainability Bonds and Social Bonds are universally rated as the most “common” ESG asset classes, and more than half of our respondents invested in these asset classes. Investors are less familiar with Sustainability Linked Bonds (SLBs), Transition Bonds and ESG linked loans. European investors are again the most sophisticated here, broadly familiar with all types of sustainable instruments, while Asian, Japanese and Middle East investors only just starting to explore less used instrument like SLBs, transitions bonds, etc.

We noted considerable differences between regions and individual investors in what sectors investors view as “ESG adherent” or “controversial”. Investors came out with a long and broad list of “ESG adherent” candidates, where the sectors named could be broadly divided into 2 groups:

(1)   sectors with the smallest environmental impact stemming from the nature of their business (IT/software/technology, banking/finance, real estate/REITs, healthcare/pharma, and so on) and

(2)   sectors utilising ESG technologies (such as sustainable utilities, renewable energy, sustainable infrastructure and waste management).

Not surprisingly, investors identified fossil fuels, tobacco, traditional power generation, coal and weapons/defence industries as the “most controversial” in ESG terms, followed by industries with higher environmental pollution (industry/manufacturing, traditional power generation) and social and governance risks (e.g. alcoholic beverages).

Investment approach to “controversial” sectors varies, but generally investors maintain a large degree of flexibility when it comes to investing, with prohibitive policies being rare and limited to particular designated funds. A number of investors noted that though such “controversial” sectors as weapons, tobacco and coal are broadly excluded by their investment policies, the oil and gas sector is part of their investable universe. 

When asked about challenges in delivering on ESG investment policy, a majority of respondents noted access to quality data, information disclosure by issuers and the standardisation of ESG metrics as the major hurdles. Among other challenges, our respondents noted “challenges of data collection and monitoring”, “developing specific ESG targets”, “supply of investable ESG product”, and “achieving internal support for ESG implementation”. Delivering adequate returns (15% of total responses) was the major hurdle for Middle East and Japanese investors.

While a quarter of investors rely solely on internal screening processes, most use third-party/external ESG data providers, such as Bloomberg, MSCI and Sustainalytics, but also rating agencies as S&P and Fitch Ratings are the most popular ESG rating providers.

As the ESG market grows and evolves, we will continue a dialogue with our investors on their ESG implementation plans and aspirations, to help us understand investors’ priorities and build our business around our customers’ needs.