Asset Owners Still “Getting to Grips” with ESG Integration

Survey reveals lack of detailed engagement with asset managers and frustration with data gaps and scoring systems.

Many large US and European asset owners do not have the tools, data and processes in place to manage ESG risks and impacts effectively, despite the majority offering ESG fund options to beneficiaries.

A survey of 200 asset owners with US$50.7 trillion AUM in total found that only a quarter currently integrate ESG scoring into their selection processes for asset managers, with barely more (29%) having asked all their existing managers to present their ESG strategies and plans.

Asset owners said data gaps in the environmental and social records of investee firms were their biggest concern regarding assessment of ESG performance, cited by 36%, while almost a third (32%) noted their inability ‘to probe causal relationships between ESG performance and financial performance’. Other concerns included ‘lack of standardisation for weighting and measuring ESG performance’ and ‘accuracy of existing ESG scoring and rating systems’.

Participants in the survey – conducted for ESG scoring analytics platform provider GaiaLens – were split equally across the two regions, overwhelmingly drawn from pension schemes. More than half held the position of chief investment officer (CIO), while around a quarter were heads of sustainability.

The survey also reported that 60% of asset owners are already building dedicated ESG portfolios and more than half (55%) are offering ESG fund options.

GaiaLens Co-founder and CEO of Seb Kirk said many asset owners were struggling to implement the required processes to integrate ESG factors in their investment decisions, leaving them overly reliant on asset managers.

“The survey reflects that many asset owners are still only getting to grips the challenges of ESG integration, with CIOs used to setting fairly broad terms of reference for asset managers to follow,” he said.

“Increasingly, however, we see that loop between the trustee and the manager closing, with the CIO getting a clearer mandate from trustees on their sustainable investment priorities and providing a more granular steer to asset managers on their expectations.”

Deeper ESG insights desired

The survey indicated a likely future increase in the demands of asset owners for deeper insights into their portfolios. More than half (56%) of survey participants said the pandemic had brought the need for impact investing into sharper focus, suggesting a growing need to make investment decisions with a view to generating measurable positive impacts on people and planet.

When asked about desired ESG capabilities, 59% of asset owners said they wanted ‘to be able to screen and monitor portfolios of investments and flag companies with high ESG risk exposure’, while almost as many (57%) wanted to be able to weight and customise their ESG scoring systems to pre-agreed investment strategy and priorities. More than half (54%) said they also wanted to be able to drill down to see ‘raw’ scores within each of the E, S and G pillars.

Survey participants also registered dissatisfaction with ESG index providers, with only 23% saying they were happy with their ESG index providers; 28% said ESG index providers’ methodologies were unclear and/or not robust.

Kirk said data gaps would continue to prevail despite the introduction of mandatory disclosure requirements in major jurisdictions, partly due to the wide and fluid range of ESG risks beings being monitored and managed by asset owners, both within investee firms directly and along supply chains.

“As recent events have underlined, asset owners need to be able to drill down on a wide range of risks and impacts within their portfolios, switching focus quickly from climate change to modern slavery to diversity and inclusion,” he said.

According to GaiaLens, responses were largely similar across the two regions, but with differences on the subject of returns, with US-based asset owners less optimistic. A third of US-based asset owners said ESG adoption is negatively impacting returns, while only 17% of European survey participants took this view.

In the study, conducted by Beresford Research, 28% of the sample held AUM of US$500 billion or more; 22% had AUM of US$250 to 499 billion, 26.5% had AUM of US$100 to 249 billion, and 23.5% had US$10-99 billion.

Separately, 680 investors with US$130 trillion AUM called on more than 10,000 to disclose data about their environmental impacts, specifically in climate change, deforestation and water security. The financial institutions requested firms with US$105 trillion disclose the data via the CDP disclosure platform, which last year recorded disclosures from around 13,300 firms.

“We don’t just need data on climate, we also need more information on other areas of natural capital, and we must ensure that this is incorporated in what companies disclose and take action on going forward,” said Jean-Jacques Barbéris, Head of Institutional and Corporate Clients Coverage & ESG Supervisor at Amundi.

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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