US institutions look for answers as ESG questions mount – Schroders

2022 promises to be a pivotal year in the lifecycle of ESG investing – one defined by the maturing and mainstreaming of ESG as an investment discipline, and by changing attitudes and approaches among global investors towards this fast-evolving area.

So says global asset manager Schroders, which recently aimed to uncover investor sentiment in the hotly debated ESG arena as part its annual Institutional Investor Study that polled 770 institutional investors worldwide with USD27.5 trillion in assets.

According to Schroders, in previous years strong performance drove ESG investment interest and appetite. For example, as of the end of 2021, money managers reported USD28.03 trillion in global assets managed under ESG principles. This figure was up by over 20 per cent from the year before, and by more than 400 per cent compared with five years ago.

“However, as interest rates, inflation, and energy markets rise, and ‘ESG friendly’ expensive growth stocks sell off, investors are being forced to re-assess and re-define ESG investment for themselves,” Schroders said. “This recalibration has brought questions surrounding performance, ESG data comparability, and investment tactics to the top of US investors’ minds.”

To US investors, questions around sustainable investment performance appear to weigh more heavily than on investors in other parts of the world. Fifty-eight per cent of US institutional investors noted performance concerns as a hindrance for investing sustainably, compared to 53 per cent of their global counterparts.

Furthermore, 70 per cent of respondents noted that evidence of improved financial performance is important or very important to them when investing sustainably.

The survey shows that investor calls on ESG are clear: comparable data, increased transparency, and better reporting are needed. Sixty-five per cent of US investors still find it somewhat or very challenging to invest sustainably – a figure remaining essentially unchanged from previous years, despite increased adoption of ESG.

In particular, this year’s survey identifies a strong need for quantitative evidence and data to support investors’ comfort with committing to ESG investing. Specifically, over half of investors (51 per cent) noted the lack of transparency and reported data as a challenge to investing in sustainable solutions.

To support investors’ exploration and adoption of sustainable investing practices, says Schroders, it is imperative that transparent and comparable data is widely available and broadly understandable.

When asked what would encourage greater investment in sustainable strategies, 68 per cent of the investors were hoping to access more quantitative evidence about the financial considerations of investing sustainably – while 59 per cent responded that enhanced reporting and transparency from asset managers is very important to them when investing sustainably.

 

Consistent and comparable data points across managers also ranked highly, with nearly three quarters of respondents (70 per cent) emphasising this as important or very important when investing sustainably.

Regarding the biggest challenges with investing sustainably, just under half (47 per cent) of respondents identified the lack of consistency with disclosures and reporting frameworks as a key issue – while 43% of respondents identified greenwashing, due to a lack of clear, agreed definitions on what sustainable investment is, as an additional problem.

To further inform sustainable investing decisions, the survey shows that investors are relying on existing market information, such as reporting by third parties like MSCI and Sustainalytics or historical performance data.

For those investors looking to invest sustainably, ESG integration is the preferred approach, with 63 per cent of respondents selecting this as their top choice. This was followed by positive screening (focusing on ‘best in class’ companies and investments) at 60 per cent. At the same time, investors report that they are prepared to scrutinise how their investments impact the environment and society, and increasingly want to quantify and account for those impacts.

When considering the various sustainable investment opportunities, 66 per cent of US respondents indicated they would like to invest in funds or solutions that focus primarily on delivering financial returns while broadly integrating ESG factors. This is notably higher than the global average of 58 per cent.

As Americans continue to expect more from corporate actors, institutional investors are also responding with an emphasis on active ownership. This year, institutional investors placed greater importance on active ownership with 35 per cent ranking this as important or very important, compared to 29 per cent in 2021.

Marina Severinovsky, head of sustainability for North America at Schroders, commented: “As the performance of naïve, passive ESG strategies falters and the regulators circle the wagons, sustainable investing is at a critical juncture. Investors are clear that they need more quantifiable evidence of the value and impact of ESG, and more clarity and transparency into how this investing is practiced and measured.”

She added: “At Schroders, we have always set a high bar with our internal definitions, and with ensuring that we can provide evidence and robust reporting on our efforts, via our proprietary tools like SustainEx for impact measurement. We welcome the next stage of the ESG investing lifecycle where industry consistency leads to deeper investor understanding.”

 

 

 

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