ESG increasingly factored into investment decisions, asset owners say

More than two thirds of asset owners say ESG issues have become increasingly material to their investment decisions over the past five years, according to new research. Just 15 percent say ESG has become less so.

Breaking down the E, S and G, environmental factors lead on materiality: more than half (52 percent) of asset owners say environmental factors have become more or much more material over the last five years. This is followed by 43 percent for governance factors and 38 percent for social.

Asset owners remain ‘highly committed to addressing an increasingly complex and persistently challenging environment for sustainable investing,’ notes the survey of more than 500 asset owners representing in excess of $10.7 tn in assets under management.

All the asset owners surveyed – across 11 countries – allocate at least a portion of their assets to strategies that take ESG factors into account, according to Morningstar’s 2023 Voice of the Asset Owner Survey. ‘Compared with 2022, the percentage of asset owners with more than half of their total assets reflecting ESG considerations has increased from 30 percent to 34 percent,’ the report authors write, ‘while the portion of those with 50 percent or less of their assets considering ESG has decreased from 71 percent to 66 percent.’

Researchers also say the survey underscores how important asset managers are to the implementation of ESG strategies: of the more than 500 asset owners surveyed for the report, 89 percent outsource the management of at least some of their assets. Just 9 percent manage all assets internally.

STAKEHOLDER PRESSURE EASES

When asked to select the three most important reasons their organization has chosen to invest in ESG-focused assets or vehicles, the landscape is little changed compared with 2022. Senior management/leadership is the top response in 2023, as it was in 2022, while ethical morals/principles, external pressure and both international and local regulation persist as popular responses as well.

Interestingly, stakeholder pressure ‘received considerably fewer responses in 2023 than in 2022,’ Morningstar notes. Though a less significant shift, it is also notable that external advisers/asset managers also received fewer responses.

REGULATORY CONFUSION

But even as ESG has gained weight as a material issue for investors, asset owners cite a number of challenges. Improved ESG data, ratings, indexes and tools are all ranked as top concerns. But ‘regulatory confusion’ is a particular challenge, with a ‘lack of clarity and rising costs related to ESG regulation as particular pain points.’

Key barriers to pursuing ESG strategies also remain largely unchanged from 2022: impact on returns tops the list (38 percent), followed by a lack of available products (32 percent). A lack of standardized data, unreliable or out-of-date data and regulation show the most significant changes since last year, however.

‘ESG regulation continues to walk the line between serving as a help or a hindrance to global asset owners,’ Morningstar writes. ‘Perhaps reflecting the growing stress of ESG portfolio implementation amid advancing regulation and cross-border regulatory confusion, the percentage of asset owners that say ESG regulations are either a ‘a major help’ or ‘a slight help’ has fallen 10 percentage points in the past year, to 49 percent.

‘In addition, the percentage of respondents reporting that regulations have no impact has risen materially, with those indicating regulation is a ‘slight hindrance’ having risen as well.’