How ESG Factors into Institutional Investing Decisions: Survey

Do institutional investors worry about ESG factors as part of their investment decision making? A new survey makes clear: The answer is yes.

The Callan 2018 ESG Survey offers a stark bottom line: “U.S.-based institutional investors are increasingly incorporating ESG considerations into their investment decision-making process. Incorporation rates in 2018 were the highest in the survey’s history and surpassed 40% for the first time.”

Last week we highlighted the impact of ESG requirements on PE firms and other investment funds. We noted that PWC published a report titled “ESG considerations for private equity firms.” One question it asks: “What are the different elements of ESG reporting? As the name suggests, private equity has traditionally remained ‘private’ and has not reported non-financial issues.”

Callan notes: “Incorporation of ESG factors into the investment decision-making process nearly doubled to 43% in 2018 compared to 22% in 2013. Our survey reveals ongoing disparity in ESG adoption rates by fund type and size. Historically, endowments and foundations have consistently had the highest ESG adoption rates. Public funds have incorporated ESG factors into the investment decision-making process at a higher rate than their corporate counterparts.”

ESG
From Callan 2018 ESG Survey
ESG Factors

Indeed, on the investment fund side, Callan asked an intentionally broad question: “Has your fund incorporated ESG factors into investment decision-making?” The response? Callan writes:

  • “Overall: The percentage of respondents in 2018 that had incorporated ESG factors into decision- making rose to 43%, up from 22% in 2013. Another 8% of respondents are considering implementing ESG in the U.S., making it around half of U.S. asset owners that are implementing ESG or considering doing so.”
  • “By Fund Type: Foundations and endowments have adopted ESG into investment programs at a greater clip than other fund types over the last six years, a trend that continued in 2018 at 64% and 56%, respectively. Corporate funds saw a decrease in ESG adoption year over year, from 25% in 2017 to 20% in 2018. Most of the decline can be attributed to the adoption rate of corporate defined contribution plans, with only 9% indicating they incorporate ESG into the investment decision-making process. More than one-third of public funds reported incorporating ESG (39%) in the 2018 survey, up from 35% in 2017.”
  • “By Fund Size: The majority (72%) of the largest respondents ($20 billion or greater) have incorporated ESG factors into investment decisions. The largest funds have incorporated ESG factors at the highest rate since the inception of the survey in 2013.”
  • “By Region: Respondents located in the Pacific (60%) and Northeast (54%) regions of the country are more likely to incorporate ESG factors than their counterparts in the Southeast (13%).”
  • “Looking Forward: 15% of respondents that have not yet incorporated ESG into investment decision-making are considering doing so, more than double the rate recorded in 2017 (7%).”

What does this mean going forward? Callan states: “Respondents that incorporated ESG into the investment decision-making process indicate that they will broaden their approach to ESG (39%) in the next 1-3 years, implying a continued progression of implementation. For those funds that have not yet incorporated ESG factors but are considering doing so in the future (15%), education remains the focus of these considerations: 57% of those considering incorporating ESG factors in the future have either received education from their investment adviser or from an ESG-focused investment manager on the topic.”

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