Global investors accelerate ESG investments in response to pandemic, says MSCI survey
The global pandemic has highlighted both the importance of ESG issues and is accelerating ESG integration by institutional investors, according to the respondents of MSCI’s 2021 Global Institutional Investor Survey, a survey of 200 asset owner institutions with assets totalling approximately USD18 trillion.
The survey of sovereign wealth funds, insurers, endowments/foundations, and pension funds found that over three-quarters (77 per cent) of investors increased ESG investments “significantly” or “moderately” in response to Covid-19, with this figure rising to 90 per cent for the largest institutions (over USD200 billion of assets).
“The combination of climate-related events, such as devastating wildfires, floods and droughts, and a global pandemic have accelerated the paradigm shift on ESG and climate change. Once an issue for ‘green funds’ and side-pockets, ESG and Climate are now firmly established as high priority issues,” says Baer Pettit, President and Chief Operating Officer, MSCI. “2020 marked a profound shift in the way institutions invest as many investors have recognised that many companies with strong environmental, social and governance practices outperformed during the pandemic.”
The survey reveals that while US investors in general have been lukewarm about ESG in the past, with some high-profile exceptions, 2020 dramatically shifted their views closer to those of their international counterparts. Of US respondents, 78 per cent said they said they would increase ESG investment either significantly or moderately as a response to Covid-19, while the figure was 79 per cent and 68 per cent in Asia-Pacific and EMEA, respectively.
When exploring future ESG investments, investors said they are putting greater emphasis on the “S” in ESG, with over a third (36 per cent) wanting “Social” to comprise a larger proportion of the mix in 2021. This increases to 50 per cent and 48 per cent in the UK and US respectively, where respondents cited Covid-19 coinciding with a reassessment of inequality in society as a driving factor.
While institutional investors are transforming their investment processes to reflect today’s imperatives, they are facing a long list of challenges over the medium- and long-term, with nuances depending on size, location, and long-term investing goals.
Although the survey revealed global differences, for many investors ESG challenges are a top concern. Almost a third (31 per cent) of institutional investors with over USD200 billion of assets said climate risk will have the greatest impact on the way the organisation invests over the next three to five years. This was followed by disruptive technologies, such as artificial intelligence for almost a fifth (19 per cent) of investors, while 14 per cent believe increasing sophistication of ESG measurement will have the greatest impact. On the other hand, smaller investors (less than USD25 billion of assets) said increasing regulations and market volatility are the major trends that will impact their investments over the next three to five years.
Due to the range of global challenges investors are facing, the survey found that respondents perceived risk as more important than traditional asset allocation, with investors of all sizes believing the diversity of risk sources was more relevant than asset allocation in achieving investment excellence.
With climate change cited as one of the major challenges, larger investors are increasing their focus on accessing and monitoring the latest climate data. Smaller institutions, however, are still at an early stage of incorporating climate data in their investment strategies. Some 50 per cent of investors with more than USD200 billion of assets said they are regularly using climate data to manage risk, compared with just 16 per cent of those with less than USD25 billion. Investors with more than USD200 billion of assets are also four times as likely to regularly use climate data to identify investment opportunities than those with less than USD25 billion.
“Institutional investors face many challenges over the next five years, which is magnified by the fact that these challenges are interconnected. These interconnections add complexity and demand urgency. The reality is, climate change links to a rapidly shifting social context that in turn drives changes to investor demands, all within a very dynamic regulatory environment. These trends are amplified by technology innovation, adding significant cost and time pressure. Quite simply, investing has never been a more complex ecosystem,” Pettit concluded.