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Institutional investors establish ESG as mainstream

4 March 2021

Institutional investors are turning ESG mainstream, as they increasingly look to adopt socially conscious investing across all asset classes. Yet consistent reporting remains an area of difficulty.

Despite Covid-19 causing turbulence in the financial markets, a new study by bfinance found that one in three investors say the pandemic has resulted in greater attention for ESG issues at their institution, particularly around social and corporate governance, including diversity.

Nearly half (48%) of asset owners globally believe that ESG considerations are now of “high importance” to their investment approach, while 39% say they’re of “moderate importance.”

The findings showed that a large proportion of investors now integrate relevant factors into asset classes where they were previously not mainstream, including 67% of private debt portfolios, 55% of emerging market debt portfolios and 76% of private equity portfolios. Investors are also using a broad mix of approaches, including ESG integration, which has risen from 29% three years ago to 64%, and negative screening, which has jumped from 29% to 53%, as well as active engagement via asset managers, active engagement directly with investee companies, impact investing and thematic investing.

According to the specialist consultant, two key priorities have risen up the agenda dramatically in recent years; measuring carbon emissions and assessing impact in areas beyond carbon emissions. Over two fifths (46%) of investors now assess the carbon emissions associated with their overall portfolio, up from 13% three years ago, while 28% now map the portfolio against the UN Sustainable Development Goals, up from 3% three years ago, including 36% of pension funds.

Despite this, bfinance says the study discovered several challenges with mainstream ESG investing. The vast majority of investors (84%) admitted to experiencing difficulties in obtaining consistent ESG reporting across asset managers and classes, while more than half experience challenges in finding external asset managers that align well with their ESG approach.

More than 90% of investors say that ESG criteria are important to them when selecting external asset managers, with over three quarters (76%) saying that they have “stricter” ESG criteria for manager selection than they did three years ago.

Kathryn Saklatvala, head of investment content, bfinance, says: “The results show the increasing breadth, depth and complexity of ESG implementation as investors look to take a more consistent, portfolio-wide, data-ground 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.”

Professional Paraplanner