HKU Jockey Club Enterprise Sustainability Global Research Institute
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Alex Edmans|Tom Gosling|Dirk Jenter
Sustainable Investing: Evidence from the Field
Feb 14. 2025
Key Takeaways
- Sustainable investing (SI), which incorporates environmental and social (ES) factors into investment decisions, seems to have become increasingly mainstream.
- This study surveyed 509 active equity portfolio managers from both traditional and sustainable funds on whether, why, and how they incorporate ES into investment decisions. Their responses reveal unique patterns:
- Both traditional and sustainable funds rank ES last out of six drivers of long-term value.
- However, this ranking does not imply ES is irrelevant or immaterial. Many investors view all value drivers as interlinked, and 85% of investors, including 78% of traditional investors, rated at least one ES issue as financially material.
- On long-term shareholder returns, 73% of sustainable and 45% of traditional investors expect ES leaders to deliver positive alpha, primarily because ES is seen as an indicator of other critical value drivers rather than a direct contributor.
- Financial performance remains the dominant objective for most investors. 73% of investors would not tolerate firms sacrificing even one basis point of annual return for ES performance, citing fiduciary duty concerns. ES constraints, such as firm policies, fund mandates, or client demands, can lead investors to make different stock selection, voting, or engagement decisions than they otherwise would.
- Investor actions reflect ES considerations. ES performance influences stock selection, engagement, and voting for 77% of investors, including 66% of traditional and 91% of sustainable investors.
- Broader conclusions about the state of SI:
- The asset management industry is unlikely to drive broad ES improvements.
- Sustainable and traditional investors exhibit more similarities than expected.
- Although investor beliefs and actions vary widely, this divide does not polarize neatly across traditional vs. sustainable lines.
- Asset owners with sustainability goals should not rely solely on fund labels when selecting portfolios.
Source Publication: Edmans, Alex, Gosling, Tom and Jenter, Dirk, Sustainable Investing: Evidence from the Field (September 20, 2024). Working Paper
Featured in Harvard Law School Forum on Corporate Governance blog, LSE Business Review Blog, LSE Research for the World Blog, Maanch Blog, Wall Street Journal, Bloomberg
Award and Grant: The PRI Award for Outstanding Research, ICPM Research Award, Leverhulme Trust Grant
Background
Sustainable investing (SI), which integrates environmental and social (ES) factors into investment decisions, seems to have achieved global prominence, with trillions of dollars now managed under the United Nations’ Principles for Responsible Investment (PRI) framework. However, whether, why, and how investors incorporate firms’ ES performance into investment decisions remain unclear.
Method
This study surveyed equity portfolio managers across the globe, asking questions pertaining to three areas of focus. The first was on fund managers’ beliefs, such as how material they view ES performance for firm value, whether they think ES is fully priced by the market, and whether they regard firms as over- or underinvesting in ES issues. The second was their objectives: are they purely financial, or do they put weight on ES performance? If the latter, what are their ES goals, and how do they trade them off with returns? The survey also inquired about their constraints: whether fund mandates, firmwide policies, or client wishes restrict how they pursue their objectives. The final area of focus was on whether ES performance affects investors’ actions, such as stock selection, voting, and engagement, and why—due to investors’ beliefs, objectives, or constraints?
A total of 509 responses were collected, spanning investors from both traditional and sustainable funds across diverse fund sizes, geographic regions, client types, and investment styles.
Figure 1a. Distribution of Funds by Assets Under Management
Figure 1b. Distribution of Funds by Type
Figure 1c. Distribution of Funds by Geography
Key Findings
Beliefs
The first question asked respondents to rank the importance of actual ES performance (not ratings) for long-term firm value relative to five other value drivers: strategy and competitive position, operational performance, corporate culture, governance, and capital structure. ES performance received the lowest average support, with 73% ranking it fifth or sixth; its average ranking was lowest even among sustainable investors.
Survey question: Rank the following by their importance for the long-term value of companies in your investment universe in aggregate (1=most important, 6=least important)
Figure 2. Investor Rankings of Key Factors for Firms’ Long-Term Value
However, the low ranking of ES performance does not mean investors view it as irrelevant. Many investors emphasized in free-text entries that, for example, all value drivers are interlinked. Others indicated poor ES performance can be a signal of other problems and that specific ES issues are highly material in specific industries. Thus, many portfolio managers have a nuanced view of ES factors that emphasizes granularity, omitted variables, and interactions with non-ES value drivers.
This low relative ranking also does not mean ES is immaterial in absolute terms. When respondents were asked to rate the financial materiality of ES performance on eight ES dimensions, 85%, including 78% of traditional investors, rated at least one ES issue as material.
Turning from long-term value to long-term returns, 73% of sustainable investors expect good ES performers to deliver positive alpha, and a notable 45% of traditional investors agree. By far, the most popular reason is that ES performance is correlated with other factors that improve shareholder returns, rather than mattering directly. Meanwhile, 67% of sustainable investors and 61% of traditional investors believe poor ES performance predicting negative alpha. This finding suggests some traditional investors view ES as a hygiene factor, where poor performance matters more than good.
The survey also asked investors whether, from a shareholder value perspective, firms over- or underinvest in the eight ES issues. For all eight, the modal response was that they invest at the optimal level. Yet, for each issue, more than 40% of investors believe firms either over- or underinvest; across all issues, 68% of investors believe companies overinvest in at least one (most commonly greenhouse gas emissions), and 51% believe they underinvest in at least one (most commonly ecological impacts). The most supported reasons for overinvestment are pressure from the media, the public, employees or investors; underinvestment is attributed to investor or company short-termism.
Objectives and constraints
The next set of questions asked about investors’ objectives and the constraints they operate under.
Only 27% of investors (24% traditional, 30% sustainable) would tolerate companies sacrificing even one basis point of annual return for ES performance; both types explained that fiduciary duty prevents
them from doing so. Instead of having an objective function that trades off social against financial value, fund managers take ES performance into account largely to improve financial returns or, as the next questions show, to satisfy constraints.
Survey question: How much long-term risk-adjusted total shareholder return would you tolerate a company sacrificing to improve its ES performance?
Figure 3. Investor Willingness to Sacrifice Returns for Improved ES Performance
71% of investors (62% traditional, 85% sustainable) report that ES constraints such as firmwide policies, fund mandates, and client wishes had led them to make different stock selection, voting, or engagement decisions than they otherwise would. The most frequent consequences were that investors had to avoid stocks that they believed would improve returns or diversification. Paradoxically, ES constraints had sometimes led investors to take actions that reduced their ES impact, such as not investing in ES laggards whose performance they could have improved.
Actions
The third set of questions investigated how ES considerations affect investor actions: stock selection, voting, and engagement.
Stock selection: 77% of investors (66% traditional, 91% sustainable) “often” or “very often” incorporate ES performance into stock selection; however, the reasons differ. For sustainable funds,
the fund mandate is most important, followed by firmwide policies and alignment with client values.
These three constraints rank higher than “to improve returns” or “to avoid downside risk.” For
traditional funds, the two financial reasons are most important, followed by the three constraints.
Despite these differences, financial reasons cause a majority of both investor types to regularly
incorporate ES performance into stock selection: 74% of sustainable and 51% of traditional investors do so to avoid downside risk, improve returns, or reduce volatility. Avoiding downside risk is a more common reason than improving expected returns, and much more important than reducing volatility. Incorporation of ES performance for financial reasons is correlated with fund managers’ beliefs on whether ES is a source of alpha; impact (affecting firms’ cost of capital or rewarding / penalizing companies for ES performance) is less important.
Voting: Consistent with the importance of fiduciary duty, only 27% of investors (24% traditional, 31% sustainable) have voted for shareholder proposals that was slightly negative for shareholder value, even though 78% have supported value-neutral proposals. Such voting, especially for negative-value proposals, is driven more by ES constraints than by the proposal’s expected impact on society.
Engagement: 76% of investors (64% traditional, 92% sustainable) have engaged with companies to improve their ES performance. Such engagement is motivated primarily by the expected increase in
the value of the investor’s stake, followed by the issue’s importance to clients, the firm, and wider
society. Marketing motivations, such as concerns for the fund’s sustainability rating and reputation,
are seen as least important. The main reasons why some investors never engage are their small stake
and the costs of engagement, consistent with standard cost-benefit analysis.
Survey question: Do you underweight poor ES performers / overweight good ES performers for any of the following reasons? Have you ever voted for a shareholder proposal when the proposal was even slightly negative for firm value? Do you ever engage with companies to improve their ES performance?
Figure 4. Investor Consideration of ES Performance in Investment Actions
Broader Implications
Beyond the individual findings, the study provides four broader conclusions about SI. First, asset managers are unlikely to lead large improvements in firm ES performance, because they are bound by fiduciary duty and believe most companies are investing in ES optimally. Second, the differences between traditional and sustainable fund managers are smaller than commonly believed. Third, despite wide heterogeneity in beliefs and corresponding actions among investors, such heterogeneity does not create a clear divide between sustainable and traditional funds. Asset owners need to understand that whether portfolio managers act as “traditional” or “sustainable” depends more on their investment beliefs and ES constraints than on how their fund is labelled. Last, we need to better understand how asset managers reflect, or fail to reflect, their asset owners’ preferences. Whether self-selection of asset owners with different preferences to managers with different beliefs and constraints achieves asset owners’ ES objectives, particularly given the difficulty of observing beliefs, is an open question.