Is ESG Financially Relevant to Investing?

A large majority of asset owners, including pensions, sovereign wealth funds, and insurers, believe that considering environmental, social, and governance information is material, or financially relevant, in the investment process, according to a new survey by Morningstar.

The survey, commissioned by Morningstar Indexes and Morningstar Sustainalytics, interviewed 500 individuals at asset owners in August about their attitudes toward ESG. The asset owners are fiduciaries who oversee some of the world’s largest pools of investment assets. There were 100 respondents from North America and 200 respondents each from Europe and Asia-Pacific, overseeing about $32.7 trillion in assets.

ESG ‘Material’ to Investment Process

Some 85% of the respondents said ESG factors are “very material” or “fairly material” to the investment process. “If you’re a fiduciary, ‘materiality’ is the magic word,” said Tom Kuh, head of ESG strategy, Morningstar Indexes, in an interview. At least 80% also described ESG as material across a range of asset classes, including listed equities, fixed income, alternatives, and real estate.

ESG has become more material for asset owners in the past five years, according to 70% of the respondents. Environmental concerns win out over social and governance issues in terms of materiality, with the most significant issues being energy management and greenhouse gas emissions.

The survey results come during a period of turmoil in sustainable investing, as practitioners have been accused of greenwashing, focusing on profits for shareholders rather than on creating solutions to the planet’s challenges, relying on confusing ratings, and practicing “woke capitalism.”

For Majority, Greenwashing Is a Problem

Some 61% of respondents saw greenwashing as a “major” or “moderate” problem. Regulation was welcomed by many asset owners, with 60% regarding it as a “slight” or a “major” help. Two thirds had observed an improvement in the quality of ESG data, ratings, indexes, and tools over the past five years. But they felt that tools needed further improvement in terms of quality, relevance, and clarity.

“Sustainable investors have ambitions about making investment more long-term, reallocating capital to more sustainable companies and projects, and hopefully changing outcomes,” Kuh said.

The new findings follow an earlier, qualitative study by Morningstar Indexes that showed pension funds and other asset owners were forging ahead with sustainable investing, despite politicization in the United States. In the survey, the respondents generally saw investing using ESG metrics “as a core element of investing rather than a specialist niche.” 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.

In a separate study on U.S. pension practices, Morningstar found that public pension funds are among the strongest proponents on key shareholder resolutions ranging from climate change and political spending to workers’ rights and pay equity.