Survey: Corruption is the top ESG concern with financial advisors

Investors are increasingly adopting environmental, social and corporate governance (ESG) principles. Flows into such funds totaled $21.4 billion in 2019, nearly a fourfold increase over the previous record set in 2018, according to Morningstar.

With more investment firms, banks and other financial institutions analyzing ESG, a large number of financial advisors indicate that they are concerned with ESG-related risks and are exploring ways to measure and manage those risks, according to financial advisor results from the 2020 RBC Global Asset Management Responsible Investment Survey.

RBC GAM asked survey respondents to rank 18 individual ESG concerns on a five-point scale (with 5 representing “it will make or break my investment decisions”). Across the board, financial advisors were more concerned about ESG risks than U.S. institutional investors.  Financial advisors ranked anticorruption highest on this scale, with 54% of advisors scoring it a 4 or 5.

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Among other key findings:

  • 73% of financial advisor respondents stated that they believe ESG-integrated portfolios perform as well as or better than portfolios that do not integrate ESG
  • 76% of financial advisor respondents said they are using ESG principles as part of their investment approach
  • 82% of overall respondents (including institutional investors) said it is important that companies maintain diversity targets throughout the organization

It shouldn’t be alarming to learn that, when it comes to risks, that anticorruption is a major issue. While some of the ESG concerns that prominent in the news – such as climate change and cybersecurity – are relatively new, corruption has been an issue since ancient times, and it remains a material issue for investors.

Corruption may take the form of government officials accepting bribes, or it may be found in an environment of loose controls within which improper agreements between private actors subvert the cause of plain dealing. It is a milieu lacking controls (or in the extreme, a state where the governmental officials are themselves corrupt). Corruption erodes trust, both public and private.

What is the scale of the corruption problem today? PwC has estimated that $1 trillion is paid out in bribes each year and that S$2.6 trillion is lost to corruption. The Principles for Responsible Investment (PRI) estimates that, on a global basis, corruption may raise the cost of doing business by 10 percent. According to PRI, corruption raises the cost of procurement contracts in developing countries by as much as 25 percent.

Transparency International, an anticorruption nonprofit, publishes an annual Corruption Perceptions Index. In the most recent listing, New Zealand and Denmark came in tied for first place as the least corrupt nations. Wealthy countries dominated most of the top spots, yet less-developed states such as Bhutan and Uruguay also ranked among the top 25. Of course, even those nations at or near the top of the Transparency International rankings can claim it is completely free from corruption.

The COVID-19 crisis has also been a fertile ground for corruption. As the United Nations noted in a report on corruption and the COVID-19 pandemic prepared for the 2020 G-20 meeting, “Corruption risks in the context of the COVID-19 crisis have and continue to be a major threat to mitigation efforts worldwide.” No doubt this is partly a function of the crisis situation itself: “It is generally accepted,” say the authors of the same report, “that corruption thrives in times of crisis.” This is especially a cause for concern at a time such as the present, when massive procurement efforts are underway.

There are organizations working to develop protocols to prevent corruption, both at singular moments like the present COVID-19 crisis and under more ordinary circumstances as well. International institutions such as the U.N. and the G-20 are articulating ways to address the problem, as are a number of nonprofits.

Before investing in a company, investors should know that good governance practices are important for investments across all industries and markets. Companies and issuers with strong policies and practices on corruption, fraud, and business ethics are better positioned to manage and mitigate these challenging issues.

Nureen Nagra, CFA, is an ESG analyst at RBC Global Asset Management.