Pension Funds Forge Ahead With Sustainable Investing, Despite Politicization in U.S.

Even as sustainable investing becomes a political football in the United States, pension funds and other asset owners in Europe and North America are adopting sustainable investment practices for their portfolios, according to a study by Morningstar Indexes.

The “Voice of the Asset Owner” survey was based on 14 interviews with asset owners. They generally saw investing using environmental, social, and governance metrics “as a core element of investing rather than a specialist niche,” according to the study.

The respondents said their use of ESG was driven by both client demand and their conviction in the strategy. They used ESG factors because of wider public awareness and support, as well as regulation that endorses asset owners taking a broader view of their responsibilities, particularly in Europe. “Before, it was globalization, efficiency,” one asset owner said. “Now, it is more emphasis on resiliency than efficiency.”

The respondents used ESG to enhance their investment processes and to help drive sustainable development. Most saw ESG as a financial factor and considered ESG objectives as valid goals when pursued alongside—but not at the expense of—financial objectives. There was also “broad agreement among respondents that ESG does not harm investment returns,” Morningstar wrote.

“ESG is mainstream, material, and multifaceted,” said Thomas Kuh, head of Morningstar’s ESG indexes strategy. “We heard almost unanimously from the asset owners we interviewed that ESG is a critical part of their investment policy and day-to-day thinking.”

That’s quite a reversal from the preceding 30 years, Kuh said, when the prevailing view was that it harmed performance. “The questions that have been out there for the last few decades seem to be settled in the minds of these 14 pension funds–that was an interesting finding,” Kuh said.

However, the asset owners see implementing ESG as challenging, Kuh says, partly because definitions and standards are shifting. They are looking for simpler, more-standardized measurements, as well as better transparency about underlying data. Another problem is low correlations between the ratings of different ESG data providers, which “reflects a trade-off between the benefits of standardization and the value of independent thought,” Morningstar wrote.

For the respondents, climate is the biggest concern, as clients urge them to address global warming. There is also a growing concern about biodiversity; among social factors, diversity, equity and inclusion were the most-mentioned topics.

“Concern about climate change and decarbonization doesn’t capture the totality of environmental issues. In many ways, biodiversity is a broader proxy for where we’ll see the impacts of climate change more broadly,” says Kuh.

The asset owners were also concerned about greenwashing, although they regard the emerging regulations to counter it as “representing more work.”

The survey findings come as sustainable investing has faced a storm of criticism that arose with accusations of greenwashing, and lately has been stoked by former Vice President Mike Pence, who claimed in a Wall Street Journal essay that ESG is empowering a “cabal” of CEOs, bureaucrats, and regulators to promote “left-wing values.”

In addition, a Texas law passed last year calls for the blacklisting of asset managers that “boycott” fossil fuel companies. The statute requires the state comptroller to maintain a list of such firms, which would render them ineligible to manage money for state pension plans and other state entities.