Institutional Investors Incorporate ESG Factors at Slower Rates

Fewer institutional investors are incorporating environmental, social and governance factors into investment decision-making in 2022, Callan data shows.

The Callan ESG Survey found 35% of respondents are using ESG factors in investment decision-making in 2022, down from 49% in 2021, the apex of ESG adoption in the survey’s history. The Callan survey found that in 2020, 42% of institutional investors reported incorporating ESG factors.

Callan’s DC index research found ESG adoption remains “relatively low,” the survey document stated: Data showed 86% of plans do not include one ESG fund, compared to 14% of plans that have at least one ESG fund in their lineup. The defined contribution data presented in the Callan ESG survey come from the Callan 2022 DC Trends Survey and the Callan DC index from the second quarter of 2022.

Incorporating ESG-factors for defined contribution plans likely remains low because of regulatory and fiduciary concerns, explained Tom Shingler, senior vice president and ESG practice leader at Callan, in a statement.

“While there are a number of asset owners incorporating ESG at increasingly complex levels, there is federal regulatory uncertainty and differing ESG policies across states and their pension systems—which have led to confusion and inaction in some cases,” the statement said. “Additionally, there is backlash against ESG from some stakeholders who question its contribution to investment outcomes, while other stakeholders demand increasing levels of ESG incorporation.”

ESG use among defined contribution plans is low, as allocations ranged from 0.3% to 8.6% of total plan assets, with an average 2.7% allocation, Callan found.

The Callan ESG survey also showed disparities between corporate versus non-corporate defined contribution plans for adopting ESG options. Among non-corporate DC plans, 25% offer a standalone ESG option, compared to only 4% of corporate plans, Callan data showed.

The decline of ESG adoption for public pension plans, from 63% to 24%, was the “biggest driver of the overall decline in 2022,” according to the survey summary.

The data shows that among larger institutional investors, ESG incorporation is higher:

• 45% of institutional investors with $20 billion or more of assets under management incorporate ESG factors into decision-making.
• 47% of institutional investors with assets between $3 billion and $20 billion.
• 33% of institutional investors between $500 million and $3 billion.
• 25% of institutional investors with $500 million or less.

“This may be attributed to larger investors typically having the most resources to dedicate to ESG incorporation and being under high levels of stakeholder scrutiny,” the survey summary stated.

The Callan survey found that the institutional investor sectors with the highest rate of incorporation are nonprofits, with 54%, followed by healthcare organizations at 38%, educational institutions at 35% and those in financial services with 33%.

Those institutional investors not incorporating ESG into investment decision-making offered varied reasons, the survey found.

Callan found 47% of investors say they do not incorporate ESG because the benefits are unclear, 31% say there is not convincing research connecting ESG factors to better performance and 28% will not consider any factors that are not purely financial in investment decision-making.

Furthermore, 25% do not incorporate ESG factors because they are unsure if adoption will result in a breach of fiduciary duty to the fund, 20% are considering ESG but have not made a decision, another 20% have not incorporated them for other reasons and 11% say they are unsure how to implement ESG factors into strategic asset allocation. 

The Callan research also showed ESG incorporation by investor type: 53% for foundations, 47% for endowments, 26% of corporate plans and 24% for public retirement plans. In 2021, the Callan ESG report showed public plans in the top spot at 63%, 57% for foundations, endowments at 50% and corporate retirement plans at 20%. In 2020, figures were 63% of endowments, 57% of foundations 36% of public pension plans and 32% of corporate plans.    

“Endowments and foundations typically have had the highest adoption rates since the survey’s inception in 2013,” the survey document stated. “[W]hile most plan types have had some consistency in adoption rates over the past few years, public plans have varied and had the most significant change from 2021 to 2022.”

Although data showed an overall decline for survey respondents that incorporate ESG factors, the interest and attention remains high, Shingler said in the statement.

“The level of interest and debate about ESG has never been more intense in the U.S.,” Shingler says.

Additional key findings from survey respondents:

• 50% incorporated ESG to meet their fiduciary responsibility.
• 20% of respondents not yet incorporating ESG were considering doing so.
• 75% of those that incorporated ESG considered those factors in every investment/manager selection.

The survey was conducted in May and June by Callan. Data was collected from 109 institutional investors in 11 different sectors.