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ESG material to investment policy, asset owners tell Morningstar

by Janessa Lee

A recent survey conducted by Morningstar Indexes and Sustainalytics has revealed that the majority of asset owners now consider Environmental, Social, and Governance (ESG) factors to be material to their investment policies. The “Voice of the Asset Owner Survey” gathered responses from 500 asset owners across 11 countries, collectively managing approximately $10.7 trillion in assets. The participants included pension funds, insurance general accounts, outsourced Chief Investment Officers (CIOs), and family offices, with 60% of them managing assets of over $1 billion.

According to the survey, 67% of asset owners reported that ESG has become more significant to their investment policies over the past five years, particularly in relation to environmental concerns and achieving net-zero emissions. Despite facing challenges in implementing ESG strategies, such as market data availability, market environments, and regulations, these asset owners have increased their allocation to ESG strategies.

One of the main implementation issues highlighted in the survey was the impact of sustainable investment strategies on returns. 38% of the respondents reported difficulties in 2022 due to the strong performance of carbon-intensive energy and utilities sectors versus the downturn of more ESG-friendly technology stocks. This suggests that balancing financial returns with ESG considerations remains a challenge in the investment landscape.

ESG regulation was also identified as a significant implementation challenge, with its prominence rising by 10 percentage points compared to the previous year’s survey. 30% of asset owners cited regulatory clarity as a hurdle they face in implementing ESG strategies effectively.

Interestingly, the survey also revealed an increase in the percentage of asset owners managing total assets with ESG considerations. This figure rose from 30% last year to 34% this year, indicating a growing recognition of the importance of ESG in investment decision-making.

Thomas Kuh, the head of ESG strategy for Morningstar Indexes, emphasized that the survey confirms the unwavering commitment of institutional investors to integrating ESG factors into their global investments. However, he also acknowledged the challenges faced by these investors, such as a lack of regulatory clarity and the need for better data. Kuh remains optimistic about the future and believes that the available data is steadily improving, as asset owners continue to push for better sustainability practices.

The survey results indicate that the consideration of ESG factors in investment policies is not only seen as a moral obligation but also as an integral part of fulfilling fiduciary duties. This strong underpinning of fiduciary duty among asset owners reflects a growing recognition of the importance of ESG factors in achieving long-term sustainable and profitable investment portfolios.

As ESG investing continues to gather momentum, it is imperative for regulators, market participants, and asset owners to collaborate and address the challenges involved. This will help create a more robust and supportive environment for sustainable investment practices, ultimately benefiting both investors and society as a whole.

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