Nearly 70% of Asset Owners Say ESG Has Grown More Relevant to Investment Process

Two thirds of asset owners believe that environmental, social, and governance has grown even more financially relevant to investing over the past five years. That was just one of the findings of our second annual Morningstar Voice of the Asset Owner global survey.

In my last column, I highlighted key findings from the first phase of our annual survey, which included one-on-one interviews with 10 asset owners across North America, Europe, and Asia. This group of institutional investors such as pension managers oversees some of the largest pools of investment capital in the world on behalf of millions of beneficiaries and other stakeholders. What they say and do carries weight, as their investment practices often influence those of wealth management and retail investors.

Prominent in the first phase of the survey, asset owners told us ESG considerations are a financially relevant part of the investment process, outweighing concerns about the political discourse around ESG. Financial materiality also outweighs considerations around the environmental and societal impact of their investments. Even if asset owners want their investments to have such an impact, their highest priority is financial.

Also, not surprisingly, asset owners acknowledged that while ESG data and analysis continue to improve, they are still looking for more and better data, ratings, and benchmarks to help put investment policy into practice.

Now, I am excited to share top-line findings from phase two of our survey, in which we took these anecdotal findings and tested them in a quantitative survey of 500 global asset owners:

• The majority of asset owners believe ESG is material to the investment process. In fact, 67% believe ESG has become more material to the investment process over the past five years. This is despite a growing set of challenges to putting ESG policy into practice. Rising to the top of ESG-related challenges cited by asset owners in the past year are market data, regulation, and the market environment.
• Climate is the highest priority of asset owners. Many asset owners are committed to initiatives that aim to be net zero by 2050 to reduce the impact of climate change. They are interested in climate transition strategies that track the reduction of real-world emissions, not simply reducing the exposure of their portfolios to carbon-intensive companies.
• ESG regulation continues to present a Jekyll and Hyde scenario to asset owners. On the one hand, asset owners expressed optimism about the benefits of ESG regulation. On the other hand, our quantitative survey shows some growing frustration. We saw a double-digit percentage drop globally in those surveyed who said regulations and the related reporting requirements are a help versus a hindrance, with lack of clarity and rising costs the other primary pain points.
• Asset owners are looking for more accuracy, higher quality, and greater relevance for ESG data, ratings, and indexes. And they are looking to international standard-setting bodies, rating agencies, and government officials, among other stakeholders, to help bring about this change. Asset owners also believe artificial intelligence will have a major influence in the coming years in data collection and ESG analysis.

This last point about AI is important in my view. Despite the challenges cited by asset owners and concerns about global markets, many leading asset owners are forward-looking. I think of them as the tip of the spear when it comes to anticipating emerging trends and incubating new investment practices. Since they are responsible for stewarding large blocks of capital over long time horizons, asset owners need to take a dispassionate view, and their actions often set the stage for other investors. As clients, their input is invaluable to how we build our business and better serve them and their beneficiaries.

Thomas Kuh, head of ESG Strategy for Morningstar Indexes, writes a quarterly letter for Morningstar.com.