We’ve been blogging about the increased importance that investors place on sustainability.
Morgan Stanley’s recent Sustainable Signals survey confirms that it is quickly becoming the modus operandi for asset owners.
Of the 110 North American, European, and Asian/Pacific financial institutions, insurers, pensions and other large asset owners who were surveyed, 95% are integrating or considering integrating sustainable investing in all or part of their portfolios. In addition, 57% envision a time when they will only allocate to managers with a formal ESG approach.
“These results provide an additional proof point that sustainable investing has become table stakes,” said Audrey Choi, Chief Sustainability Officer and CEO of the Institute for Sustainable Investing at Morgan Stanley. “This year’s survey found more asset owners identifying return potential as a key driver for sustainability integration, and accordingly many envision a future where they will limit their allocations to managers with formalized sustainability approaches.”
The survey brought to light five major trends:
1) Increased Importance on Sustainable Investing
Eight in ten asset owners now integrate environmental, social and governance (ESG) factors into the investment process across the board or in part of their portfolio. This is an increase of 10% in two years.
Constituent demand, financial return potential, and evolving policy and regulation on ESG disclosure around the world are major factors pushing this adoption.
Those who practice sustainability see huge reputation and stakeholder engagement benefits. An added bonus is a lower carbon footprint and other environmental/social outcomes, which reflect well on a business. It’s also often accompanied by enhanced financial performance.
2) Better Tools Needed to Measure Sustainability
Almost half of those who responded believe that generating social and environmental returns is as important as generating financial returns. In addition, 80% agree that companies with ESG practices make better long-term investments.
But how does one put a number on sustainability in order to determine whether or not one is doing “well”? Or even to be able to compare one company to another?
According to the survey, nearly a third of the asset owners mentioned that they lack adequate tools to assess how investments align with their ESG goals.
Overall, this lack of quality data is now viewed as the most significant barrier to sustainable investing.
The report found that “asset owners are looking to third-party research and ratings, rankings and data providers to help fill these gaps, but may not be able to source the data they need given ongoing data quality challenges.”
This dilemma is not new. The topic comes up in every major report regarding sustainability. Some potential solutions were discussed in a previous blog post on the different ESG ratings and what they mean.
3) Environmental Issues Rank Highest for Thematic and Impact Investors
Issues such as climate change, water solutions, plastic waste and the circular economy are top on the environmental list for thematic and impact investors — those who prefer to take more of a multi-decade view and pursue strategies that address structural change, i.e. sustainability trends, which affect the economy, society, and the environment.
Gender diversity and education are top social issues.
Almost all of the investors surveyed seek to have a more global economic impact, though a quarter still prefer to target investments within their home country or region.
However, environmental concerns trump social and economic factors.
4) Most Common Approach to Sustainable Investing is ESG Integration
ESG integration is the most popular sustainable investing approach. Nine in ten survey respondents look at companies who proactively consider ESG criteria alongside financial analysis. This is up from 41% in 2017.
Eight in ten employ restriction screening or exclusionary, negative or values-based screening of investments. This is most commonly used for weapons, tobacco and coal.
According to the report, “Public equities (78%) and fixed income (69%) are the asset classes where most investors find quality sustainable investing strategies.” For those allocating to fixed income, almost half invested in green or sustainability bonds or bond funds.
5) Growing Need for Third-Party Investment Managers
Two-thirds of asset owners surveyed want key stakeholders in their organization to learn more about ESG integration, impact investing and thematic investing.
However, 86% of those surveyed see an increased role for outside investment managers. These third-party employees would help with portfolio reporting on ESG performance; provide education on ESG/sustainable investing approaches, issues and trends; and help write an appropriate Investment Policy Statement incorporating ESG or sustainable investing criteria.
The world is changing rapidly as everyone strives to come to terms with a “new normal”. But one thing is certain: sustainability as a consideration to investing is core to a company’s future.
Click here for a copy of the full report.
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