ESG Strategies in Most Institutional Investor Portfolios

Most institutions (80%) have an environmental, social and governance (ESG) component as part of their investment strategies, according to a survey of 475 global institutional investors in the United States, Europe and Asia Pacific, including some of the largest pension plans, endowments and foundations, commissioned by State Street Global Advisors.                              

More than two-thirds (68%) of respondents say integration of ESG has significantly improved returns. In addition, 69% say pursuing an ESG strategy has helped with managing volatility.

ESG implementation is driven by a no-compromise approach: three-quarters have the same performance expectations for ESG as they do for other investments.

The depth of ESG exposure within portfolios remains low: only 17% of respondents have more than 50% of assets with exposure to ESG factors, and 44% have less than 25%. One-third of this group has between 25% and 50%.

There are some challenges that inhibit greater adoption of ESG investments. Benchmarking is seen as one of the greatest challenges, the survey finds. More than half of respondents say they find it difficult to benchmark performance against peers and that accurate assessment of external ESG managers is an issue.

In addition, there’s internal confusion around what exactly ESG constitutes: three-quarters of respondents say there is a lack of clarity around ESG terminology in their organizations. Concerns around data, performance measures, internal capabilities and costs vary according to current levels of ESG investment exposure and maturity.

Integration is on the rise, but full integration of ESG criteria into long-term decision-making is low (just 27% are fully integrated), according to the survey. While most investors (78%) recognize the value of engagement with companies, some may be attempting to do too much with limited internal resources. Many respondents recognize the value of using firms with specialist expertise to help them deploy their ESG strategies. More than half use asset managers with a specialist division.