One third of investors say the pandemic has increased their focus on ESG issues, with the issue now a focus across asset classes, research from bfinance shows.
The consultant's global survey of 256 senior staff at pension schemes, foundations, insurance firms, endowments, family offices and other asset owners - representing a combined $7tn (£5.11trn) in assets under management - found three key themes were emerging.
First, it said ESG is increasingly becoming a total-portfolio subject, with investors seeking to approach the key issues in a way that encompasses all asset classes.
It also said ‘impact' is rising up the agenda as the community moves towards thinking about ESG in terms of outcomes.
Yet the research additionally found that significant obstacles remain, particularly with respect to data - noting that 84% of the investors it polled say that the lack of consistent, standardised ESG information across all asset classes and asset managers represents a challenge.
Investors' priorities are changing
The survey found that ESG has remained high on investors' priority list through the Covid-19 era - with one in three saying that the pandemic has actually resulted in greater attention for ESG matters at their institution, particularly in relation to social and corporate governance matters including diversity.
In total, 48% of asset owners globally say that ESG considerations are now of "high importance" to their investment approach while 39% say they're of "moderate importance" - a cumulative total of 87%. European investors still prioritise the subject more than their global counterparts, with 45% of US respondents saying that ESG issues are of "minor" or "no" importance.
The research also found that two key priorities have risen up the agenda dramatically in recent years: measuring carbon emissions and assessing ‘impact' in areas beyond carbon emissions.
It said 46% of investors now assess the carbon emissions associated with their overall portfolio, up from 13% three years ago, with a further third "actively considering" this step. 28% now map the portfolio against the UN Sustainable Development Goals, up from 3% three years ago, including 36% of pension funds while a further 38% are "actively considering" this point.
While priorities and objectives are evolving, major challenges remain, with the data question chief among them. Some 84% of investors said they were experiencing challenges in obtaining consistent ESG reporting across asset managers and classes, with 55% calling this a "major challenge". Investors said they were also finding difficulties in validating the investment case for ESG or impact investing and more than 50% experience difficulties in finding external asset managers that align well with their ESG approach.
ESG trends increasingly consistent across asset classes
As ESG becomes an all-portfolio issue, the survey found large proportions of investors integrate relevant factors into asset classes where they were formerly not mainstream, including 67% of private debt portfolios, 55% of emerging market debt portfolios and 76% of private equity portfolios.
Survey responses showed asset owners using an increasingly broad mix of approaches including ESG integration, negative screening, active engagement via asset managers, active engagement directly with investee companies, impact investing and thematic investing.
It found there has been substantial growth in the prevalence of all of these practices within specific asset classes over the last three years. In fixed income, for example, ESG integration has risen from 29% three years ago to 64% while negative screening has risen from 29% to 53%.
Impact investment and thematic investment are still used by a minority of investors in each asset class, but their popularity has risen dramatically in the last three years: 35% of real assets investors now do thematic ESG investing, up from 15% three years ago, with a further 20% "actively considering" doing so.
Investors have widely differing beliefs about the connection between ESG and performance, with 82% expecting ESG equities to outperform over the next three years (35% "strongly agree") versus 70% (17%) expecting the same in bonds. These expectations become substantially firmer over a 20-year horizon.
ESG matters driving manager selection
More than 90% of investors said that ESG criteria are important to them when selecting external asset managers (60% "strongly agree"), while 42% have fired at least one asset manager where ESG matters were a contributing factor to that termination (19% "the primary/major factor").
Investors are also demanding more from their service providers, with 76% saying that they have "stricter" ESG criteria for manager selection than they did three years ago. Although asset owner respondents emphasised that manager ESG assessment should not be a "box-ticking exercise", an increasingly large proportion say they are "unlikely" to hire managers with certain ESG characteristics, such as not being a signatory of PRI (63% "unlikely to hire" in equities, 43% in real assets), not having a dedicated ESG headcount (43% in fixed income) or lacking gender/ethnic diversity (31% of investors in hedge funds "unlikely to hire").
bfinance head of investment content Kathryn Saklatvala commented: "The results show the increasing breadth, depth and complexity of ESG implementation as investors look to take a more consistent, portfolio-wide, data-grounded and in many cases impact-minded approach.
"Yet the advancement also brings challenges: investors with increasingly clear objectives and priorities in this space are even more frustrated by the lack of clear, consistent, standardised data on many of the key issues."
Of the respondents to the survey, some 51% were pension schemes. Over half of respondents (55%) were based in Europe. In terms of size, 21% represented assets under management in excess of $25bn, 15% assets under management of $10-25bn and 52% assets under management of $1-10bn.
