Although the aspiration to apply environmental, social, and governance (ESG) considerations to the investment process is exceptionally high, with an estimated 88% of total U.S. public market assets affiliated with a Principles for Responsible Investment (PRI) signatory, a display of formal commitment is still lagging. Cerulli’s latest report, U.S. Environmental, Social, and Governance Investing 2019, estimates that a majority of signatories (representing 90% of total signatory product assets) demonstrate ESG capabilities on their website or elsewhere, but just 4.5% of signatory assets are described in their official product documents (e.g., prospectuses) as taking ESG considerations into account to inform investment decisions.
Managers cite client unfamiliarity with ESG factors (26%), the perception that considering ESG issues has a negative impact on performance (25%), and difficulty defining the boundaries of ESG (25%) as major challenges to client receptivity. “Given these challenges, many asset managers shy away from documenting that ESG factors inform investment decisions,” quotes Michele Giuditta, director at Cerulli. In addition, the United States has not seen the same level of push for regulatory changes around ESG considerations from its government, as compared to countries across Europe—another major barrier to formal commitment.
Asset managers believe that ESG factors have financial relevance, with 89% citing that they have an ESG integration approach. However, firms vary in their approach to ESG integration and how comprehensively they emphasize their ESG analysis. Processes often vary across asset class, investment strategy, and investment teams.
Organizations sign the PRI to publicly demonstrate their commitment to responsible investment. While the PRI was established in 2005, membership by U.S. asset managers is a more recent phenomenon, with more than two-thirds signing on in the last five years. Although many firms have adopted ESG principles, figuring out how to implement them continues to be a work in progress. “We are in the beginning stages of adoption, with many firms just starting to build their ESG integration processes,” says Giuditta.
As the industry continues to make strides in demonstrating that ESG integration has financial relevance and terminology becomes more common, Cerulli believes that documentation of the ESG information used to help inform investment decisions will become broadly adopted.