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A survey of asset owners from around the globe showed that dedication to the implementation of ESG investment goals is continuing – with a high level of motivation – despite numerous teething problems around regulatory frameworks and politicisation.
The survey, “Voice of the Asset Owner”, from Morningstar Indexes and Sustainalytics, featured more than 500 asset owners across APAC, North America, and Europe.
The survey correlated with another recent Morningstar report focused on asset managers, which showed that English-speaking countries (UK, US, and Australia) filled the lower end of the ESG investing commitment spectrum.
Those surveyed included pension funds, insurance general accounts, outsourced Chief Investment Officers (CIOs) and family offices, with six in 10 managing more than $1 billion, and over a quarter managing $10 billion or more. Questions covered investment approach, the materiality of ESG considerations, perspectives on regulation and implementation, and the relative quality of ESG data, ratings, and indexes.
"Participants did not rate any ESG challenges as having decreased.”
It revealed that two out of three asset owners, or 67%, believed that ESG had “become more material to investment policy in the past five years”. They specifically said that the environment and issues around net-zero emissions were key drivers to materiality
“While implementation challenges continue to persist, this global cohort reported increasing their allocation to ESG strategies,” Morningstar said in its statement on the survey’s results.
According to the results, asset owners identified a range of growing ESG implementation challenges in 2023 – ranking market data, the market environment, and regulation as the most significant.
“Tellingly, participants did not rate any ESG challenges as having decreased,” said the report.
It added that, "ESG market data is hindered by lack of standardisation (30%) as well as reliability and timeliness (29%), according to those surveyed". Both percentages were up from 15% last year.
Regulation was also a key concern around ESG – an especially pressing issue given the recent implosion of the Net Zero Insurance Alliance earlier this, partly attributed to antitrust competition laws in certain jurisdiction.
"We have to consider developments in the international landscape and ensure there is interoperability because clients are going to want to invest globally."
In general, regulation remains one of the biggest areas of contention. Wendy Walford, Head of Climate Risk at Legal & General, said that, “people’s interpretations of the terminology are still nascent. We’re grappling with what these terms mean, so the development of the regime is critical."
"We have to consider developments in the international landscape and ensure there is interoperability because clients are going to want to invest globally,” she said.
Walford stressed that – at least in the UK, with differing government bodies and regulatory frameworks – this situation could result in a rushed feeling. No one wanted a botched rollout, she said, which could lead to reduced enthusiasm going forward.
Survey participants said that regulations and related reporting requirements were helping, but the number of people that felt this way had fallen by 11 percentage points to 49% from 60% in 2022.
"The drop is especially pronounced in APAC nations, falling from 59% last year to 46% this year and those with AUM of $10 billion or more (63% last year, 49% this year),” it said. “Those working for pension funds (46%) and insurance general accounts (45%) were more likely to find ESG regulations less helpful.”
The report also found that a lack of clarity on ESG regulations and responsibilities for asset owners, as well as rising costs, were major pain points. The number of those surveyed saying ESG regulations had been a hindrance was 28%. Of this, 42% saw them as confusing or unclear, which was up from 29% in 2022. The number rose to 46% in Asia.
These numbers could reflect the fact that markets in Asia, such as China, are slightly less mature in ESG implementation – and therefore rules are still being embedded and culture is still developing.
“Only 18% of the 49% globally who say ESG regulations have helped this year believe they have minimal costs, [which was] down 20 percentage points from 38% in 2022 and dropping to 15% among European asset owners,” the report added.
Not having enough ESG data was a recurring theme for asset owners. It’s been an ongoing issue for several years.
In 2022, Kroum Sourov, ESG Sovereign Investments & Research at Candriam, told Insurance Investor that “there are still no common industry standards”, and that stakeholders “[needed] to navigate an increasingly diverse landscape of data providers and key performance indicators”.
"Despite their differences and the fact that each is on a different step within their own ESG journey, asset owners are unified in their ESG commitment."
Sourov also said that most of the data that’s available is reported with a delay, which means it is “often the case that the reports investors receive from asset managers include financial performance for the current period, while key performance indicators refer to past periods”.
Artificial Intelligence (AI) was predicted to have a major impact on ESG investing and data needs in the coming years. Morningstar said that the majority of asset owners believed the adoption of AI would increase either moderately or significantly across areas of data collection (70%), ESG analysis (67%), portfolio construction (55%), and index creation (56%).
Despite these challenges, Thomas Kuh – Head of ESG Strategy at Morningstar Indexes, and the co-author of the report – said there was no weakening in the belief that ESG is critical. “We were reminded that, despite their differences and the fact that each is on a different step within their own ESG journey, asset owners are unified in their ESG commitment.”
He added that, in fact, asset owners were “consistent in detailing the challenges they face[d] as well as their commitment to addressing [them]”.
