Over 40% of institutional investors incorporated environmental, social and governance factors into their investment decision-making process, and 56% of those incorporated ESG into every investment or manager selection, according to Callan’s 2020 ESG Survey.
After a slight downtick from 43% in 2018, 42% of institutional investors have adopted ESG in their decisions in 2019 and 2020.
Related: ESG investing: Getting respect, gaining traction
However, concerns over unproven or unclear benefits to ESG are still obstacles to wider adoption, as 39% of investors said this was their main argument against ESG factors. Another 30% said they only consider “purely financial” factors in their decision making.
The most popular reason for adopting ESG is in response to stakeholders’ concerns, Callan found. Sixty percent of investors cited this as their top motivation, up from 54% last year. Over half of investors said they use ESG factors to align their portfolio with their organizations’ values.
Investors with between $500 million and $3 billion were the most likely to invest in ESG at 55%. Above that level, utilization ranged from 43% to 47%.
“Historically, the largest institutional investors (>$20bn) have incorporated ESG factors at the highest rate since the survey’s inception in 2013,” Callan wrote in the report. “This year’s results suggest a more level playing field than in the past, which is consistent with the greater awareness of ESG and broader availability of information on the topic from a variety of sources, including industry groups, investment consultants, asset managers, and data providers.”
Regionally in the U.S., Northeastern investors were the most likely to incorporate ESG into investment decisions (53%), followed very closely by the Pacific region (52%). These areas also saw a huge jump in adoption between 2013 and 2020: from 23% to 53% in the Northeast and 20% to 52% in the Pacific.
In other areas, adoption was much lower. Although investors from the Central region were the second largest group in the survey, adoption is only 38%, up from 36% in 2013. A quarter of Southeastern investors use ESG, and in the Mountain region, which included just six respondents, 17% of investors incorporate ESG into their decisions.
ESG funds haven’t gained much ground in defined contribution plans. Just 26% of plans offer an ESG option, and among the plans in the Callan DC Index, adoption is even lower at 13%.
“However, this number masks a large divide among plan types: only 5% of corporate DC plans offer a standalone option, compared to 43% of public and nonprofit plans,” Callan noted. “In addition, utilization for all sponsor types remains low. Allocations range from 0.2% to 3.1% of total plan assets, with an average allocation of 1.2%.”
Callan noted that these rates put ESG within DC plans at a similar level to emerging market equity, REITs, and global/global ex-U.S. fixed income.
Investors are largely satisfied with their ESG strategies, Callan found, with 37% saying they don’t plan on making any changes in the future. Twenty-three percent will consider using another ESG data provider, and 14% are considering hiring an ESG manager. Sixteen percent of investors say they will increase the number of factors they use.
Related: ESG, impact investing: ‘Doing good’ while delivering on performance
While COVID-19 has had an incredible impact on most areas of our lives, 60% of investors said it hasn’t affected their ESG initiatives.
“While roughly one in five respondents was uncertain of the coronavirus’ impact or did not answer, it is notable that almost three times as many institutional investors believe COVID-19 has increased their pace of ESG adoption (14%) as opposed to slowed it down (5%),” Callan noted.
READ MORE: