ESG Remains Important for Pension Funds and Asset Owners

Asset owners face the thorniest investment challenges today, dealing with inflation, geopolitical instability, and systemic risks like climate change. They oversee some of the world’s largest pools of capital, steering investment policy on behalf of pension plans, foundations, endowments, and sovereign wealth funds. Their practices shape the capital markets and the behavior of asset managers, financial advisors, and retail investors.

They invest with a long time horizon and are exposed to the entire global market. That means they can’t diversify away from risks that reduce economic efficiency and contribute to volatility and uncertainty. As a result, many pursue sustainable investing strategies.

“These big asset owners control the world’s most influential capital,” according to Roger Urwin of insurer Willis Towers Watson. The top 100 asset owners control $25.7 trillion in assets in 2021, according to a report from WTW’s Thinking Ahead Institute. In total, asset owners controlled $112.3 trillion in 2021, with pension funds representing 56% and sovereign wealth funds 37%. The largest asset owner in the world is Government Pension Investment Fund (Japan), followed by Norges Bank Investment Management (Norway), and China Investment Corporation.

Thus, learning their views about environmental, social, and governance approaches is important to understanding how they will shape their portfolios going forward. It’s been my experience in my decades in the industry that asset owners are incredibly measured about what they say and are often reluctant to discuss their views. This caution is understandable, given the number of key stakeholders ranges from the pension boards who determine high-level policy, to plan participants. Their words can affect all these stakeholders in different ways.

We encountered this hesitancy as we reached out to dozens of leading asset owners around the world to request one-on-one interviews for the qualitative phase of our second annual Morningstar Voice of the Asset Owner Survey, conducted by Morningstar Indexes and Sustainalytics to learn about the growing influence of ESG factors and sustainable investment considerations.

Ultimately, 10 asset owners representing pension plans from North America, Europe, and Asia spoke with us in depth. Their views inform the broader quantitative survey of hundreds of asset owners, the results of which we will publish later this year. Here’s what we learned.

• ESG is financially relevant, and asset owners think about financial relevance before politics. Two common characteristics of the asset owners we spoke to are their directness and their practicality. This group looks to the markets to set investment policy and—particularly in the United States—sees politics as just another factor to consider in the investment mix. Asset owners see themselves as fiduciaries first and in our discussions were adamant that ESG considerations are a financially relevant and material part of the investment process despite whatever political pressure or debate comes into play. In fact, one respondent referred to the current political environment in the U.S., in which ESG investing has been subjected to political criticism, as the “weaponization of investment sectors.”
• Asset owners believe in impact, or generating positive social or environmental effects in addition to competitive returns … as long as it’s material. When it comes to ESG investing, in our discussions we saw a dynamic tension for asset owners between impact and materiality. We asked them to map themselves on a grid showing how important they see the financial materiality of ESG factors relative to the social and environmental impacts of their investments. Most asset owners see their fiduciary duty as first financial, with impact as a secondary consideration. They acknowledged the importance of social and environmental impacts, but this tended to vary across asset owner types and geographic locations.
• Asset owners are going beyond climate to consider other ESG issues. I was interested to see how quickly asset owners are evolving in their views and outlook on climate, which shouldn’t be surprising given that this cohort is often on the leading edge. While climate is still the leading factor in the ESG investment outlook for asset owners, they are clearly broadening their views beyond carbon to include a broader set of environmental issues such as biodiversity and sustainable food and agriculture, along with other issues such as a just transition, human rights, living wages, diversity, inequality, and tax fairness.
• Asset owners want better tools. Given that asset owners are some of our most important clients, we couldn’t help but ask them if they believed they had all the resources necessary to do their jobs effectively. While asset owners acknowledge that ESG data and analysis continue to improve, they are still looking for more and better data, ratings, and benchmarks for use in their investment decisions. This is not new, as a similar theme was voiced in last year’s survey as well, and it is incredibly useful to Morningstar as a provider of ratings, data, research, and indexes for institutional investors.

These findings, while interesting on their own, should be considered anecdotal given the small sample size. My colleagues and I are excited to test these initial findings and observations in our upcoming global quantitative survey of asset owners, where we will reach a much larger and more varied group. We expect to publish the results at the end of September. Watch this space.