Investments that weigh environmental, social and governance (ESG) factors have a material impact on the investment policies of a group of recently surveyed asset owners. But hurdles remain on the road toward implementing ESG policies, respondents say in the multipart “Voice of the Asset Owner” report from the Morningstar Indexes and Sustainalytics teams.
The second part of this study, which is a quantitative survey of 500 asset owners, was released Thursday. Here’s what financial professionals, including advisors, can take away from the data.
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ESG Factors Are Important, But Barriers Remain
In the survey of global asset managers, Morningstar asked 500 respondents about their attitudes toward, implementation of and barriers to ESG investing.
Among those surveyed, 85% said ESG factors are material to their investment policy.
Conversely, just 29% of survey respondents reported that ESG factors are considered for more than half of their firm’s total assets under management (AUM).
What gives? Asset owners cited several concerns when asked about barriers to pursuing an ESG strategy. The top three factors include:
- Impact on returns (38%)
- Lack of available products (30%)
- The reluctance of clients and stakeholders (30%)
For some color, investors can look to the first part of this Morningstar survey, which included interviews with 14 leading asset owners.
On the topic of returns, for example, one interviewee says, “We cannot go to pensioners and say ‘Oh well, your pension’s going to be reduced because we decided we needed to save the planet.’ That is not happening.”
Additional hurdles included difficulty reporting (27%), lack of agreement on objectives (26%), fiduciary duty (22%) and regulation (20%).
Greenwashing as a Hurdle
In the study, 23% of asset owners cited greenwashing as a major problem. Another 38% cite it as a moderate problem.
Greenwashing is typically the practice of using misleading data or language to make an asset or organization appear more environmentally conscious than it is.
Most asset owners who see greenwashing as a problem say more transparency is the best solution. This is followed by stronger enforcement of current regulations (18%) and more regulations (17%).
How Asset Owners Implement ESG Policies
To execute ESG strategies, asset owners rely on various resources and tools.
According to Morningstar, proxy advisors are used most frequently (32%). The kinds of partners relied on for ESG decisions, however, vary widely. They include strategic partners (30%), specialized ESG data providers (29%), investment consultants (28%), ESG rating providers (28%) and index providers (25%).
Additionally, 91% of asset owners report that active stewardship, which includes proxy voting, “plays at least a slightly significant role in their ESG program,” the report says.
One last takeaway: Asset owners rated environmental concerns as more material than social and governance issues
While ESG factors are contributing to the construction of investment policies for many asset owners, challenges remain. In a Morningstar analysis, these financial professionals cited concerns about returns, the dearth of available products and client reluctance as trip-ups on the road toward ESG implementation.
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