While the voices of those pushing back against environmental, social and governance guidelines are growing louder, fund issuers, asset managers and other financial professionals are increasingly relying on such criteria to make investing choices.
That’s the conclusion of two studies issued this week by investing industry researchers Morningstar Inc. and FTSE Russell.
ESG has become a political hotbed, facing a backlash from “anti-woke” investment advocates. At the same time, ESG advocates are criticizing large asset managers for not promoting ESG values sufficiently.
The SEC is looking to tighten up disclosure requirements and naming rules around ESG products. And a recent study from KPMG found that nearly half of asset management CEOs are planning to temporarily suspend or reevaluate their ESG implementation during the next six months.
That said, ESG isn’t going anywhere. Their assets under management will double to $10.5 trillion by 2026, according to a recent PwC survey.
Almost all 500 respondents to Chicago-based Morningstar’s Voice of the Asset Owner Survey take ESG into consideration regarding their asset management. Respondents came from insurance companies, pension funds and other industries. The report also says 71% of participants use ESG strategies in less than half of their assets.
Eighty-six percent of those responding in the FTSE Russell survey, which is in its sixth edition, said they are implementing at least some sustainable investment strategies in their portfolios—that’s up from 76% in the 2021 survey. FTSE Russell, a unit of the London Stock Exchange Group, polled 184 asset owners in the Americas, Europe, Middle East, Africa and Asia. Most came from the pension fund industry.
‘“There are a number of different vectors bearing on asset owners around sustainability,” Thomas Kuh, head of ESG strategy for Morningstar Indexes, told ETF.com. He goes on to note he was struck by the variety of motivations for asset owners to adopt sustainability investing approaches, and that the concept of sustainability is a work in progress.
Asset Owner Priorities
Meanwhile, Sylvain Chateau, global head of sustainable investment product management at FTSE Russell parent LSEG, told ETF.com that the continued mainstreaming of sustainable investing was what stood out to him from his firm’s survey. He also notes that the “social” component of ESG has grown in importance, overshadowing climate-related concerns.
“I don’t think it’s because it’s not a priority anymore. I just think it’s because it’s fully factored in,” Chateau said.
Social criteria are less defined and more fragmented, he added: “You don’t have one big KPI where you can say, ‘I have a way to characterize the risk.’”
View of ESG/Sustainability
The two survey reports take slightly different approaches to asking asset owners about their views of ESG or sustainable investing and why they pursue such strategies.
The Morningstar survey found that 38% of respondents see financial relevance in ESG, while 22% said they can sacrifice at least some returns for the sake of ESG goals, and 10% said ESG goals are as important as financial goals.
When asked what the most important factor is in choosing to invest in ESG strategies, 32%, the largest group of respondents, said senior management or leadership, followed by external advisors at 28% and external pressure at 27%. And 38% said “impact on returns” was a barrier to choosing an ESG strategy, while lack of available products and client or stakeholder reluctance both were selected by 30% of the participants.
Meanwhile, FTSE Russell respondents were asked about how they view sustainable investing, and 72% said it was about being a universal investor, in that a market where climate and sustainability standards are practiced and enforced will have more stable long-term returns. That’s up from 56% last year, though it was still the top choice then. More said they were willing to trade off financial return for social or environmental impact, up to 16% of respondents from 9% last year.
Kuh and Chateau were sanguine about the backlash against ESG and sustainable investing, which includes accusations of woke investing and greenwashing.
“While greenwashing is an issue, a lot of it is growing pains in the industry,” Kuh commented.
Chateau has similar sentiments about the shift against the ESG tide:
“I see that as a sign of the maturity of an industry, where you start to have more standards, more regulatory requirements. It also demonstrates that it’s becoming a large business.”
Chateau also notes that in the current market environment, stocks typically considered ESG aren’t performing that well, while stocks typically screened out by ESG criteria like defense and energy companies are outperforming, and he believes that could be playing into the backlash against ESG and sustainability.
Contact Heather Bell at [email protected]