ESG set to take center stage, institutional investors say
The pandemic has driven up adoption of ESG strategies.
Environmental, social and governance investing is shifting from a “side issue” to a strategy for institutional investors’ core funds, according to the “MSCI Investor Insights 2021: Global institutional investor survey.” Over a quarter of respondents believe that by the end of 2021, ESG analysis and decision making would be “completely” integrated into their main fund, and 34% said it would be incorporated “to a large extent.”
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MSCI surveyed around 200 executives in September 2020 for the report. Collectively, they own $18 trillion in assets.
“The pandemic, and indeed 2020 as a whole, has built a powerful narrative around ESG investing,” MSCI wrote in the report. Sales reached record levels, particularly in the U.S., where 78% of investors increased their ESG investment is a direct result of the pandemic. Over three-quarters of institutional investors said companies with a strong ESG bent have shown better continuity planning during the crises of last year, MSCI found.
However, investor size has a significant impact on how they perceive challenges. Investors with over $200 billion in assets cited climate change as the biggest trend impacting investments over the mid-term. Increasing regulatory burdens was the top focus for investors with between $100 billion and $200 billion.
The smallest investors, those with under $25 billion, shared that concern, but cited market volatility as the biggest trend impacting investments. Investors with between $25 billion and $100 billion reported that increasingly sophisticated ESG measurements would have the biggest impact on the space over the next three to five years.
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MSCI found that investors are beginning to prioritize the “social” elements of ESG funds. Thirty-six percent of respondents said that the pandemic has led them to seek out funds that are weighted more heavily to social factors. In the U.S., 48% of respondents said they were focusing more on social.
MSCI drew a picture of U.S. investors as agile, data-centric and motivated to pursue ESG investing. U.S. investors were quick to cut expenses following the start of the pandemic, and to ramp up hiring and spending again as they recovered. They were nearly twice as likely as international investors to say disruptive technologies would have the biggest influence on their investments in the coming years, and to say that technology represented an investing constraint.
“Although the U.S. market offers extensive investment tools and data, U.S. investors still want more and better,” MSCI wrote in the report.
And, despite the “polarizing” nature of sustainable investing and climate change debate in America, 59% of U.S. based institutional investors believe increasingly sophisticated ESG options will have the biggest impact on ESG investing in the future.
Top ESG activities for U.S. investors include active ownership (78%), risk and opportunity integration (67%), and climate change metrics (52%). MSCI also found that 59% of U.S. investors have adopted an ESG framework, slightly above the average of 52%.
MSCI noted that in addition to demonstrating accountability to stakeholders, adopting frameworks like the United Nations’ Principles for Responsible Investment or the Task Force on Climate-related Financial Disclosures, the two most popular frameworks, “may help investors think more broadly about risk management, developing their ESG strategy and driving internal cultural change.”
Risk management is fundamental to institutional investors’ practices, and climate risk is becoming a bigger part of that management, according to the report, particularly among large investors. Half of investors with more than $200 billion in assets regularly incorporate climate data in their risk management decisions, compared to 16% of those with under $25 billion.
In spite of that level of utilization, MSCI found that some large investors still see climate data analysis in risk management as “an emerging discipline,” citing lack of familiarity, longer-time horizons and lack of consensus on metrics and definitions as challenges.
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