ESG adopted by largest asset owners as part of ‘universal owner’ strategies

Climate commitments require ‘3D’ mandates to incorporate impact, alongside risk and return.

The world’s largest asset owners are embracing ESG integration as part of a shift toward ‘universal owner’ investment strategies, according to research from The Thinking Ahead Institute (TAI).

In its latest study of the 100 largest asset owners globally, the institute reported increased levels of ESG integration and active ownership, with a growing focus on real world impacts of investment strategies.

These highly collaborative ESG-based strategies involve working with industry groups, such as the Principles for Responsible Investment and Net-Zero Asset Owner Alliance, and a focus on improving long-term financial outcomes through market return (beta) rather than chasing market outperformance. They also highlight ESG risk and considerations, leading to a greater diversification of investment portfolios.

The universal owner strategies increasingly employed by top asset owners aim to address systemic risks to society, the environment and the financial system, without sacrificing risk-adjusted returns. These broader-based approaches often also include factoring in member views, adopting a wider range of investment benchmarks and reporting on impacts via the Task Force on Climate-related Financial Disclosures framework and with reference to the UN’s Sustainable Development Goals and the Paris Climate Agreement, in line with a global push towards a sustainable economy and renewable future.

The Institute’s Asset Owner 100 2020 report also found that the world’s 100 largest asset owners grew overall by 6% last year to reach over US$20 trillion in assets under management.

“Increasing numbers of the AO100 are following nation states and corporations in declaring their intention to align with the Paris Agreement and be net-zero by 2050, via their investment portfolios, said Roger Urwin, co-founder of The Thinking Institute. “This is an ambitious goal and will require new types of investment mandates that explicitly incorporate a third dimension of investment after risk and return: impact. These three-dimensional mandates will, of necessity, have to be highly innovative portfolios and engagement strategies if they are to deliver a combination of real-world impacts and improved portfolio outcomes.”

“This is consistent with a new era of ESG – which we call ESG 3.0 – that is fundamentally different from previous versions in that it includes real-world impacts on the environment and society, while delivering better outcomes for beneficiaries.”

Pension funds dominant

According to the new study, the AO100 remains dominated by pension funds, holding a 61% share of overall assets. Sovereign wealth funds account for 32% with outsourced chief investment officers and master trusts combining to make up the remaining 7% respectively. Collectively, they are responsible for more than one third of global asset owner capital. “The AO100’s influence on other investors and society is growing and becoming more important,” Urwin stated.

Japan’s Government Pension Investment Fund (US$1.556 trillion) is listed as the largest universal owner, while the China Investment Corporation ranks as the largest sovereign wealth fund (US$0.941 trillion). The Asia Pacific region accounts for more than 36% of all AO100 assets. The top 20 funds total US$11 trillion, representing 54.4% of the assets of the 100 entities ranked.

Insurers, foundations and endowments are not included in the AO100 ranking, because they do not fall fully within the Thinking Ahead Institute’s definition, but the study does present total assets for the top ten entities in each category.

The Thinking Ahead Institute was established by Willis Towers Watson in January 2015 and is a global not-for-profit investment research and innovation member group made up of engaged institutional asset owners and service providers.

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.

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