Sustainable investing hits key levels, survey finds

Sustainable investing – which is increasingly being used by asset managers for its potential to manage risk and drive returns – has reached a ‘tipping point’ in terms of its presence among investing processes, according to new research.

The findings highlight the need for boards and governance teams to engage with shareholders on ESG issues,  particularly as they enter the proxy off-season, a time when many focus their outreach efforts.

Of those polled by the Morgan Stanley Institute for Sustainable Investing and Morgan Stanley Investment Management (MSIM), almost half already integrate ESG criteria across all their investment decisions, and 84 percent are at least ‘actively considering’ doing so. The survey polled 118 public and corporate pensions, endowments, foundations, sovereign wealth entities, insurance companies and other large asset owners worldwide.

‘Across asset classes, sustainable investing seems to have reached a tipping point,’ the authors of the research report write. ‘We find that sustainable investing has entered the mainstream and has overcome past inertia that may have associated the inclusion of ESG criteria with discounted returns.’

Although respondents see public equities and real assets as the sectors with the most attractive sustainable investing opportunities, the interest is there across asset classes, including fixed income and private equity. Only hedge funds are viewed as attractive by fewer than half of respondents.

Roughly $22.9 trillion – more than one quarter of the world’s professionally managed assets – now have some sort of sustainable investing mandate. Around $8.7 trillion of that is in the US, $12 trillion is in Europe and the rest is shared by other regions, the report states.

The steady increase in these assets over the past two decades has accelerated in recent years, with sustainable investing assets growing at a compound annual growth rate of 11.9 percent, according to the paper. The survey finds that 60 percent of asset owners integrating ESG into their investment process have only begun to do so within the last four years, and 37 percent within the last two.

‘Sustainable investing has gone from a niche investment idea to attracting enough capital to start having an impact on global challenges at a meaningful scale,’ the authors write.

The report suggests that there continues to be room for growth in the role of ESG factors in investing. More than a quarter of professionally managed assets now have a sustainability mandate – but more than three quarters of institutional asset managers ‘feel they have a responsibility to address sustainability through their investments,’ according to the report. Among the respondents, 77 percent say they have this responsibility, with 44 percent agreeing strongly.

Drew Hambly, executive director for corporate governance with MSIM, said in a recent interview that the firm is not prioritizing particular ‘E&S’ issues, but is focusing on key issues a company or industry is dealing with. For example, environmental risk and safety issues facing oil and gas companies.

‘We want to understand which topics the board is reviewing and discussing to get a sense of what it views as material on the risk or opportunity side,’ he says. ‘We’re trying to be partners with our companies on these topics and to have a sense that the topics we’re thinking about are also ones they are thinking about.’