Anti-ESG Movement Will Not Deter US Asset Owners

Morningstar’s Voice of the Asset Owner Survey spotlights the need for better ESG data and tools, with investors “concerned” about quality. 

ESG investment has reached “critical mass” and will not be deterred by anti-ESG rhetoric, with asset owners underlining its “fundamental materiality”. 

Morningstar Sustainalytics and Indexes’ second ‘Voice of the Asset Owner‘ survey identifies key priorities and perspectives of institutional investors, including ESG data and their fiduciary duty in the face of US regulatory headwinds. 

The first qualitative phase of the 2023 study consisted of direct conversations with ten asset owners with at least US$124.8 billion in combined AuM across North America, Europe and Asia, comprised of nine pension funds and one investment consultant. 

“We thought it would be useful to essentially begin building a record of how the views of asset owners are evolving on a lot of ESG issues,” Thomas Kuh, Head of ESG Strategy at Morningstar Indexes, told ESG Investor.   

“This is an area where, particularly when it comes to sustainable investment, we felt that there was an opportunity to gain greater insights.” 

According to Kuh, who authored the report, the survey aims to offer asset owners an opportunity to discuss the issues that are driving their behaviours and practices. 

Morningstar uses the responses to craft questions for a quantitative survey which is sent to hundreds of asset owners. The first quantitative survey received 500 responses, with the data and analytics provider looking to publish its second survey report by the end of September. 

Anti-ESG movement’s “fundamental flaw” 

The report noted that despite political pressures, asset owners globally are “adamant” that ESG considerations are a “financially relevant and material part of the investment process”. 

Several asset owners that were interviewed by Morningstar for the survey said that ESG-oriented investment considerations are “driven by fiduciary duty”, with one asset owner adding that to “outlaw [such consideration] entails a breach of fiduciary duty”. 

This year there have already been over 100 anti-ESG bills filed in the US, more than double the 39 filed the whole of 2022. Last year, Republicans states withdrew US$1 billion in assets from BlackRock over the asset manager’s ESG investment policies. 

A group of Republican states recently requested a federal judge in Texas to strike down a Biden administration rule allowing socially conscious investing by retirement plans, while earlier this year the Indiana Public Retirement System estimated that state employees could lose up to US$6.7 billion in pension returns in the next decade due to anti-ESG state House bill.  

The majority of asset owners interviewed by Morningstar said that they saw ESG as ultimately becoming “integrated into mainstream investment practices due to its fundamental materiality”. 

A managing director of a US$17.2 billion North America-based religious organisation pension fund said that some states are “quick to criticise ESG”, but that criticism has the “fundamental flaw” of not seeing ESG issues as investment issues.  

Kuh said the US asset owner respondents’ basic perspective was that they were “not going to be deterred” by anti-ESG pressure due to their fiduciary duty, including a duty of care and a duty of loyalty. 

He suggested that the organised opposition to ESG investing is coming from “many of the same sources that have been behind climate denialism [and] in support of fossil fuel interests”. 

Kuh added that the momentum behind sustainable investing is such that the backlash against ESG and attempts to hinder it are “only going to be an impediment” and is “not going to stop it”. 

“It’s really a fiduciary issue, not an ideological issue or political issue,” he said. “That’s something we’re going to probe even more deeply in the quantitative survey.” 

Improving data quality 

Asset owners acknowledged that ESG data and analysis has continued to improve, but they are “still looking for better data and tools for use in decision making”. 

Last year’s Voice of the Asset Owner survey found that two-thirds of asset owners felt the quality of ESG data had improved, but one in ten said that standards had in fact declined. Just under half of respondents (48%) said they would benefit from more accuracy, 42% from more timeliness and 41% from more objectivity.  

A portfolio manager of a US$20 billion Australia-based superfund said that it was “less concerned” than 5 years ago about the volume of ESG ratings and data products but “more concerned” about their quality.  

A chief investment officer of a US$64 billion US State treasury fund noted that the “entire industry struggles” with the standardisation of ESG data, as well as the access to complete or “decision useful” data.  

“That is certainly something that needs to improve and will continue to be a focus as it relates to evaluating each company,” they added. 

Another asset owner said there was a “mismatch” between the regulatory requirements and the standardisation of data that becomes available. 

ESG ratings and data provider regulation is currently being developed in a number of jurisdictions, with there being movement in the EU, UK, India and Singapore in recent weeks. Kuh said that data was “maturing from the consultation stage” and is “becoming more concrete”. 

However, he warned that outcomes should not be regulated.  

“Just because credit ratings are very highly correlated, doesn’t mean that ESG ratings ought to be very highly correlated,” he said, adding that regulators are “creating the infrastructure for more uniform disclosure”. 

Additional asset owner perspectives 

The report underlined the “important role” played by asset owners in global capital markets, with them acting as fiduciaries that oversee pools of capital and steer investment policy for pension plans, foundations, endowments and sovereign wealth funds.  

It said that the quantitative part of the survey will explore areas including whether the global investment landscape will become more favourable for asset owners in 2023 or if major concerns like geopolitical instability and inflation are still worrying them.  

It additionally intends to explore if the dialogue, scope and investment approach around climate is broadening, as well as whether service providers like asset managers, data and index providers are keeping pace with the needs of asset owners. 

Kuh said that asset owners “drive so much of the development of best practices in this area” that Morningstar believes it’s vital to keep in touch with what’s top of mind, adding that as a service provider, offering data, ratings and indices, it needs to understand asset owners’ priorities.  

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

Copyright © 2023 ESG Investor Ltd. Company No. 12893343. ESG Investor Ltd, Fox Court, 14 Grays Inn Road, London, WC1X 8HN

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