US Institutions Increase Commitment to ESG

Most asset owners are moving in the direction of a full integration of ESG factors into their investment process and across all portfolios, according to Coalition Greenwich, a division of CRISIL.

The latest report from Coalition Greenwich entitled “Targeting Impact: Integrated ESG and the Role of Thematic Strategies in Asset-Owner Portfolios” found that increasing numbers of institutions have started to incorporate allocations to sustainable thematic investment strategies they see as having the potential to enhance impact levels, diversify portfolios and provide an additional source of alpha generation.

Davis Walmsley, Coalition Greenwich, Head of Client Relationships, Investment Management, said: “Regardless of which approach asset owners ultimately select, the decision on how to implement ESG criteria will have important ramifications for all institutions, as growing shares of assets and portfolios fall under the umbrella of sustainability.”

In 2016, 52% of asset owners participating in a previous study conducted by Greenwich Associates had incorporated some element of sustainability into their investment processes. 

Five years later, that share is closer to 72%, according to the findings.

Looking ahead, nearly eight out of ten institutions expect to have adopted sustainability criteria into investment decision-making processes by 2026.

As a study participant from a U.S. corporate pension fund explained, “[Sustainable investing] will continue to surge, driven by increasing consumer demand, and more investors will likely recognize that sustainable funds provide returns comparable to traditional funds, in addition to lower risk”.

According to the findings, sustainability is also spreading within individual organizations. 

Five years ago, most asset owners employing sustainability criteria were using these factors in only a discrete portion of their portfolios. 

At that time, roughly one in five institutions overall were employing sustainability criteria across all assets. 

Today, nearly half (47%) of asset owners apply sustainability metrics to all their portfolios, including 13% who say sustainability criteria are now “fully integrated” into their investment processes. 

“Although the COVID-19 crisis accelerated many existing trends in financial markets, that does not seem to be true for sustainable investing,” Walmsley said.

“As more asset owners establish their in-house frameworks and begin meaningful allocations to specific sustainable strategies, the industry’s focus will quickly switch from adoption and incorporation to results,” he said.

“Going forward, however, asset owners and their managers will come under mounting pressure from both internal and external stakeholders to document the positive impact of their investments,” he said.

The report also reveals that about a quarter of U.S. asset owners don’t have a process in place for measuring the impact of their sustainable investments.

Walmsley said that one of the biggest challenges asset owners face in measuring the impact of their sustainable investments is a lack of reliable third-party data. 

“ESG data is still very much a work in progress. Ratings and results differ significantly from provider to provider, based on the goals of their reviews and the methodologies they employ. The lack of consistency in ESG data complicates both the process of allocating sustainable investment dollars and measuring the impact of those investments,” he said.