Despite this year’s lackluster performance of the stock and bond markets, a 2022 survey by the Index Industry Association (IIA) found that asset managers increasingly consider environmental, social and governance (ESG) factors when making investment decisions. And the trend is only expected to accelerate in the coming decade.
In its second annual ESG global survey, IIA found that 85 percent of the 300 asset managers in the U.S., U.K., France, and Germany considered ESG a priority in their investment offering and strategy in the past year. In addition, about a quarter said it’s “much more of a priority.”
“By the early part of the next decade, investment fund companies we surveyed expect ESG elements to account for a staggering 64.2% of their asset management portfolios on average,” stated the survey.
In addition, fixed income was the fastest-growing asset class for ESG investing. Seventy-six percent of the managers now use ESG criteria to invest in bonds. This compares to just 42 percent reported in 2021.
“In fact, the growing role of bonds in ESG investing is part of a more general broadening of ESG investing beyond its traditional home in equities (which, incidentally, also saw an increase, from 53% of companies in 2021 to almost three quarters in 2022),” noted the report. “Commodities are also getting more attention from ESG investors, with 47% of fund-management companies we surveyed now implementing ESG criteria for this asset class, compared with 37% in 2021.”
What was even more encouraging is that over 80 percent of managers expected ESG to increase in stocks, bonds, and commodities over the next 12 months. Another 18 percent saw the use of ESG criteria to “increase a lot in bonds.”
The survey was conducted by an independent market research agency interviewing some of the largest investment firms. In the U.S., 19 percent had assets under management between $1 billion and $10 billion, 24% from $11 billion to $50 billion, 28% from $51 billion to $100 billion, and 19% over $100 billion.
Among the priorities of looking at ESG were a concern for ESG factors themselves, followed by the need to diversify financial returns and a desire to improve returns. Reputation and regulatory risk, high energy prices, and geopolitical events also played a role.
“The resilience of ESG investing appears to be driven by the intertwining of ESG objectives with core financial performance considerations for fund managers,” noted the survey. “ESG investing is able to withstand shocks and setbacks because it is not seen as something transitory or done in response to external pressure, but as a core part of delivering financial returns.”
Within the elements of ESG, some geographical differences were noted. Fifty-one percent of U.S. respondents said environmental criteria were a core part of their portfolios. The U.K., France, and Germany, focused 40 percent, 37 percent, and 26 percent on the environmental component.
Social criteria were considered in 75 percent of U.S. cases, while governance represented 47 percent. Social and governance were more important for companies using indexes for investment purchases than those using them for benchmarking.
However, the report also pointed out that while the “findings suggest that fund management companies seem to be giving broadly equal weight to the different ESG components, a series of attitudinal statements in our survey reveals that environmental concerns, at least at this point, tend to be more front-stage for investors, with social and governance criteria still in something of a backstage role.”
The more diffuse and hard-to-measure social and governance factors could partly explain this. Despite the recent improvements, ESG data and ratings could still be improved. Thirty-one percent of firms said there was a lack of transparency and the need for greater public disclosures of companies’ ESG actions. Other challenges were the absence of standardization in data across markets and sectors, ratings and methods among providers, and a shortage of quantitative data.
Nevertheless, there were significant improvements in the ESG toolkit this year vs. last. There were more effective tracking tools, metrics, and services in all three of the ESG criteria.
“In the face of geopolitical events and evolving regulations, the reliability and transparency ESG indexes provide is essential to the investment ecosystem,” said Rick Redding, IIA CEO, in a press release. “As ESG investing continues to expand, the index industry will continue meeting investor demand for better benchmarks.”