Incorporation of ESG Factors Into Institutional Investor Decisions Leveled Off

Adoption rates of environmental, social, and governance (ESG) factors into the investment decision-making process among institutional investors has leveled off, according to the Callan 2017 ESG survey.

Overall incorporation of ESG factors into investment decision-making plateaued at 37% of respondents in 2017, on par with 2016 (37%) and up from 2013 (22%). Callan says this trend reflects changing survey respondents over time (a larger portion of smaller and corporate funds responded in 2017 than in previous years), as well as multiple years of investor education around ESG coming to fruition.

Further suggesting a plateau in adoption rates, 7% of respondent firms that have not yet incorporated ESG factors into investment decisions were considering doing so in the future, down from 22% in 2016. There has been a 68% increase in the rate of ESG adoption since inception of Callan’s survey in 2013.

The largest of funds (with $20 billion in assets under management or more) continued to incorporate ESG factors into the investment decision-making process at a much higher rate than their smaller counterparts: 78% for the largest funds compared to 30% for the smallest funds ($500 million in assets or less).

Foundations reported the highest rate of ESG incorporation (56%) in 2017, followed by endowments (39%), public funds (35%) and corporate funds (25%).

The top implementation method for survey respondents that are incorporating ESG into investment decisions in 2017 was to add language to the investment policy statement (50%). The top reasons cited for incorporating ESG factors into investment decisions in 2017 were:

• My fund must consider ESG factors as part of our fiduciary responsibility (47%);
• The fund’s investment policy statement dictates that we consider ESG factors (42%);
• We expect to achieve higher returns and we expect to achieve an improved risk profile (32%).

More than half (61%) of U.S. institutional investors that responded to the survey have not incorporated ESG factors into investment decision-making, in line with 2016 (60%). The most common reason cited in 2017 was that the fund would not consider any factors that are not purely financial in the investment decision-making process (41%). The next most popular answer was that the value proposition for ESG remains unclear (39%). Callan notes this is down from 63% in 2016.

Callan’s 2017 ESG Survey reflects input from 105 unique institutional U.S. funds and trusts with more than $1.1 trillion in assets.