Stockholm (NordSIP) – The ESG backlash that has been emerging in the United States and some European countries does not appear to be overly influencing institutional asset owners, according to new Voice of the Asset Owner report published by Morningstar on 6 October 2023. While challenges remain, a growing number of asset owners are convinced of the materiality of ESG factors and are continuing to build up their allocations to sustainable investment strategies.
Morningstar carried out the research in two phases, a qualitative one based in in-depth interviews with ten asset owners in North America, Europe and the Asia Pacific (APAC) region, followed by a quantitative survey of a further 500 asset owners that was completed in August 2023. Large institutions were well represented, with a quarter of the respondents managing more than $10 billion in assets and 60% of the cohort managing more than $1 billion. 91% of the asset owners outsource all or part of their management to third parties.
ESG integration on course despite headwinds
Since the 2022 survey, the percentage of asset owners with more than half of their total assets reflecting ESG considerations has increased from 30% to 34%. Conversely, those with 50% or less of their assets integrating ESG has decreased from 71% to 66%. The largest allocators to ESG strategies are in Europe, followed by APAC and North America. The key drivers of ESG implementation are senior management, ethics, external pressure from media and campaigners as well as regulatory changes. When asked what prevents further ESG implementation, the respondents cited the potential negative impact on returns, a lack of suitable products and reluctance on the part of stakeholders. The fastest rising concerns as compared to last year are disagreements on objectives, increased regulation, and a lack of standardised and reliable data. Reporting difficulties and perceived clashes with fiduciary duty are gradually subsiding as primary concerns.
The healthy recruitment market for sustainability experts is reflected in the growing number of respondents building up their internal ESG teams. These typically work in tandem with external providers, with 30% of the asset owners relying almost exclusively on outside help. This trend towards building in-house ESG expertise reflects the growing belief in the materiality of sustainability factors. 67% of respondents believe that ESG has become more material in the last 5 years, driven mainly by environmental factors. 52% of the asset owners believe that net-zero emissions is the most material environmental issue, with diversity and inclusion leading the way among social themes.
Regulatory love/hate relationship
The evolution of ESG regulations is seen as a mixed blessing by the asset owners in the survey. Although still a minority, the proportion of investors seeing ESG regulations as a hindrance has grown from 25% to 28%. The remainder point to greater clarity of definitions, easier IT system integration and standardisation as helpful developments over the past year. The detractors complain of confusing and inconsistent frameworks along with rising implementation and integration costs. The battle against greenwashing appears to be bearing fruit, as fewer respondents are viewing it as a major problem. Nevertheless, 55% of respondents still see it as a moderate or major problem and are looking for increased transparency along with stricter and better enforced regulations as the most effective countermeasures.
Almost two thirds of the survey respondents are enjoying continued improvements in ESG data and metrics but would nevertheless like to see better accuracy and timeliness from providers. A similar proportion expect Artificial Intelligence (AI) use to become more prevalent, particularly for data collection and analysis.
Overall, the Morningstar report paints a picture of an evolving ESG investment market, with asset owners getting on with the work of integrating sustainability risk and return factors into their portfolios and investing in the requisite data resources and staff despite persistent concerns about complex regulatory and disclosure frameworks, data coverage and reliability along with corporate greenwashing. The positive ESG integration trend suggests that asset owners are not being deterred by ongoing attempts to politicise sustainability and the so-called ESG backlash that has been manifesting itself particularly in some US states.