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More investors in the Middle East and around the world are increasingly looking to increase gains by putting their money in companies that are working to bring positive social and environmental changes.
ESG investing, in which investors consider environmental, social and corporate governance factors when choosing financial instruments, is growing, particularly among institutions and wholesalers, Invesco’s latest report suggests.
The study, which interviewed more than 200 investors that manage more than $25 trillion in assets, found that 84 percent of institutions and 71 percent of wholesalers – all of them factor investors – had an ESG policy in place, while more than half were already incorporating, or considering incorporating, ESG into their factor portfolio.
“Most investors saw ESG as aiding factor strategies,” Invesco said.
It found that some 64 percent of institutional and 47 percent of wholesale investors perceived a “helpful symbiosis, believing that incorporating ESG in factor models” should help manage short-term downside and yield more returns over the long term.
The fifth Invesco Global Factor Investing report, released on Monday, puts the spotlight on factor investing, a strategy whereby securities are chosen based on their characteristics and attributes that have tended to offer favourable risk and return patterns over time.
More allocations
It found that investors are not only increasingly incorporating ESG into their portfolio, they are also making additional factor allocations.
Investors in Europe, Middle East and Africa (EMEA) appear to show more appetite for increasing allocations over the next 12 months (47 percent), compared to their peers in North America (31 percent) or Asia Pacific (44 percent).
Overall, the majority (97 percent) of factor investors are planning to either maintain or increase their factor allocations over the next 12 months.
The rise in factor allocations, Invesco noted, has been partly fuelled by the broader adoption of factors, including its incorporation into additional asset classes such as fixed income, and by the gradual building up of exposures over time.
This year, 65 percent of institutional and 67 percent of wholesale investors reported that their factor allocations met or exceeded their overall performance expectations in the 12 months leading up to the study.
Exchange-traded funds
According to Georg Elsaeeser, senior portfolio manager at Invesco, it is likely that exchange-traded funds (ETFs) will also play an important role in the “ESG space”.
Over the past 12 months, Invesco said, the use of ETFs has increased further among both institutional and wholesale investors, with 60 percent of institutions now making use of ETFs, accounting for an average of 14 percent of their factor portfolios.
In the wholesale segment, more than two-thirds of investors make use of ETFs, accounting for half of factor portfolios overall. And for wealth managers, ETFs are usually the primary vehicle for gaining factor exposure, making up three-quarters of the average factor allocation.
“For respondents that are investing in factor strategies based around passive indexing strategies, ETFs are particularly valued for their ease of use and price,” Invesco added.
Fixed income
Investors are also increasingly looking to fixed income, with 40 percent of the respondents saying that they now use factors in fixed income, while more than a third are actively considering doing so.
The study also found that 63 percent of the investors agreed that factors in fixed income are equally as important as in equities.
“The relatively high proportion of respondents either investing in fixed income via factors, or considering their introduction, points to the appeal of more systematic approaches to the asset class. Investors cite the potential for a factor approach to shine a spotlight on alpha generation by active fixed income managers and bring more transparency to the market overall, as has been the case with equities,” said Elsaesser.
(Reporting by Cleofe Maceda; editing by Seban Scaria)
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