A majority of institutional investors have yet to fully embrace environmental, social and governance investing, and those who do typically are early stage — that is, they only use negative and positive screening to adapt portfolios, according to a new study by CoreData, a financial services research and strategy consultant.
The online study of 800 global institutions representing total assets of about $16 trillion was taken during the second quarter 2019, and also included several in-depth interviews, according to Craig Phillips, head of international CoreData Research. Institutions surveyed included pension funds, multi-managers, insurance companies, private banks, endowments and foundations and sovereign wealth funds.
The study showed that 52% of those in the study were still ESG adopters, while 37% were ESG embedders — those that show a high degree of incorporation through corporate engagement, sustainability themes and impact investing. The rest, 11%, had no ESG focus.
"The biggest surprise the study unearthed was that despite all the grandstanding, institutional investors are only just beginning the ESG journey," Phillips told ThinkAdvisor in an email. "Investors are largely early-stage adopters of ESG and have some way to go before they incorporate and embed sustainable investments into portfolios."
He said this showed a "disconnect between ESG appearances and reality," raising the question of whether institutions "see ESG as merely a marketing and PR tool or something that can genuinely help investors align their values with investments."
When broken down, of the ESG adopters, 50% did negative screening, 45% did positive screening and 61% did ESG integration. Of that, 37% that are embedders, 38% did ESG engagement, 37% did sustainability themes, and 36% focused on impact.
The study also broke down which global regions were adopting ESG faster, with a global average indicator being 4.2. Europe, which has aggressively pushed regulations in the area — especially with climate change — is the leader with a 5.1 ranking, and the only "embedder" of these products. Next is Asia at 4.3 and Latin America at 3.9. Dead last is North America, especially the United States, at 3.6, which still is in the "adoption" stage.
"We think it is only a matter of time before U.S. firms — both asset managers and institutional investors — wake up to the ESG challenge," Phillips said. One reason is growing evidence that sustainable investments "deliver superior performance," he said.
"We also think the governmental and regulatory framework will become more supportive amid changing social values regarding [ESG]," Phillips said, adding that asset managers will play a key role in getting investors on board the ESG train. He noted that "lack of transparency in ESG reporting presents a major challenge to wider adoption and incorporation globally."
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Ginger Szala
Ginger Szala is executive managing editor of Investment Advisor magazine. She covered the financial business and alternatives industry for 30 years while editor of Futures Magazine Group. MSJ Northwestern, BA University of Wisconsin-Madison. She is based in Chicago. Go Blackhawks!
