Institutional investors committed to — and challenged by — ESG

While institutional asset managers worldwide say they’re committed to ESG, implementation challenges persist, an annual Morningstar survey suggests.

The survey, which is in its second year, was conducted in August among 500 asset owners — including pension funds, insurance general accounts, outsourced chief investment officers and family offices — across 11 countries in North America, Europe and the Asia-Pacific region. It found that two-thirds of asset owners (67%) believed ESG has become more material to investment policy in the past five years. The environment and net-zero emissions were cited as key ESG materiality drivers.

While survey respondents reported increasing their allocations to ESG strategies this year, implementation challenges persisted, with the top three being ESG performance, market data and regulation.

Specifically, 38% of respondents cited the impact on returns, which was also the leading challenge in last year’s survey as markets favoured energy and utilities.

As for ESG data, 30% of respondents cited a lack of standardization — up from 15% last year.

And 28% of respondents cited ESG regulation as an implementation challenge — up 10 percentage points from 2022. Pain points for ESG regulation were lack of clarity and rising costs, the survey found.

Morningstar said asset owners engaged with a range of stakeholders to close gaps around the quality of ESG data, ratings and tools, holding international standard-setting bodies (38%), rating agencies (36%) and politicians (34%) most responsible.

“As stewards of some of the largest pools of global capital, asset owners have stayed anchored to their fiduciary duty despite a range of challenges related to ESG market data, regulatory confusion and market performance,” said Arnold Gast, ESG research director with Morningstar Sustainalytics, in a release. “As their job becomes increasingly complex, asset owners continue to raise their expectations of a range of key stakeholders to provide better insight, research, data and tools to address the evolving sustainable investment landscape.”

Respondents also expected artificial intelligence to have a growing impact on their ESG concerns, with 70% citing an impact on data collection, and 66% citing ESG analysis.

Survey respondents had combined assets of approximately US$10.7 trillion. Questions were based on direct interviews conducted with 10 asset owners earlier this year.

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