Asset owners struggle against widespread realignment of ESG investments

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Asset owners struggle against widespread realignment of ESG investments

Only 25% have integrated ESG rating into existing investment manager selection processes

Posted: Tuesday, April 5, 2022 – 12:00 PM

(GaiaLens: London) — Some 60% of the largest asset owners based in the United States and Western Europe, which together account for $50.7 trillion in assets under management, are already building environmental, social and corporate governance (ESG) portfolios; more than half (55%) offer ESG fund options.

Yet despite this large-scale ESG investment shift, only a quarter (25%) of all asset owners have incorporated ESG scoring into their existing investment manager selection processes, and only 29% have done so. requests for all of their existing investment managers. present their ESG strategies and plans to them.

Negative test hits tobacco and gun makers hardest

Moreover, less than a quarter (22%) directly address shareholders’ ESG concerns by engaging them more on the subject. Only 13% of asset allocators applied negative screening of certain types of investments or sectors; just over 18% have already withdrawn from certain sectors with which they no longer wish to be associated. Of those who used a negative screen, nearly three-quarters (73%) eliminated tobacco companies and 69% eliminated weapons/defence equipment suppliers.

Health is the biggest winner from testing positive

About one in six (15%) asset owners apply positive screening techniques as part of their ESG realignment work. The biggest winner was healthcare stocks: 83% of companies that apply positive screening favor investments in the healthcare sector, while 72% select “good for the environment” stocks. Interestingly, 88% of European asset owners favor environmentally friendly stocks, while only half of US-based asset allocators favor green investments.

More than a third don’t think ESG realignment can drive higher returns

US-based asset owners remain more skeptical about whether realigning ESG investments can deliver higher returns than previous benchmarks, at least in the short term: a third (33%) of senior decision makers and CIOs of US-based asset owners believe ESG adoption has a negative effect on returns. However, just over half that number (17%) among decision-makers based in Western Europe think so.

Additionally, 9% of decision makers were unsure if higher returns could be achieved through ESG realignment. Taken together, higher returns from ESG realignment skeptics averaged 34% for the 200 CIOs and senior decision makers surveyed in early January 2022.

The quantity, quality and consistency of data are key concerns in measuring ESG performance

Gaps in the provision of social and environmental performance records of public companies remain the primary concern of CIOs tasked with determining the ESG performance of the organizations they select for investment. On average, 36% of asset owners (40% in Western Europe and 32% in the US) said this lack of data was a major concern for them. CIOs were asked to list only their top three concerns associated with accurately assessing ESG performance.

Almost as many, an average of 32%, were concerned about their inability “to probe the causal relationship between ESG performance and financial performance”. the manufacturers interviewed.

Well over a quarter, 27%, included “lack of standardization to weight and measure ESG performance” of companies in their top three concerns. This was a major concern for 29% of CIOs of asset owners based in Western Europe.

Nearly a quarter (22%) of asset owners consider “the accuracy of existing ESG rating and rating systems” to be one of the top three concerns. Again, in Europe, this was a slightly bigger concern, with 23% of CIOs placing the accuracy of ratings and rating systems as their top concern.

Only one in five (21%) asset owners said they were happy to have “a good command of [their existing] ESG rating and rating systems.

Automatic reporting of ESG risks required

When asked what capabilities asset owners most wanted, 59% of CIOs said they needed “to be able to select and monitor investment portfolios and report companies highly exposed to ESG risks” as an absolute priority. Two-thirds (65%) of CIOs based in Western Europe ranked it among their top two, indicating that it was either “essential for our needs” or ” considerably important”.

Almost as important was the ability to “weight and customize any ESG rating system we use” according to a pre-agreed strategy and investment priorities. On average, 57% of asset owners’ senior decision makers considered this to be ‘essential for our needs’ or ‘significantly important’.

Detailed analytics capability requested by more than half of asset owners

The potential to drill down to see the raw scores in each of the E, S and G pillars and the characteristics of these pillars is not far behind in terms of importance: on average, 54% of asset owners consider this ability to explore in depth as essential to their needs or considerably important.

On average, just over half (54%) of asset owners consider “hybrid metrics that provide a causal link between ESG performance and long-term financial performance” to be “essential to our needs” or “significantly significant”. In Western Europe, 59% of asset owners’ ESG decision makers consider it with this level of importance.

Gordon Tveito-Duncan, Co-Founder and Head of ESG Technology at GaiaLens, commented: “Many of the findings from our in-depth study of the CIOs of the largest asset owners in the public, corporate, pension, sovereign wealth funds, endowments and foundations. based in Western Europe and the United States, confirm our anecdotal findings that asset owners are struggling to put the systems in place to support the massive task of realigning their portfolios to reflect the rapid transition to investments ESG friendly.

“The speed of this transition means that the application of robust systems and processes, due diligence, as well as the application of ESG rating and rating, and the collection of sufficient data to feed into these systems are patchy at best. and completely lacking in certain areas.

“To put it simply, the application of ESG-related data collection, rating and analysis systems by asset owners is catching up. There is ample evidence of gaps in the data and inconsistencies in ratings. We fully intend to revisit progress in these areas in a year’s time to see how much this has changed.”

About the GaiaLens study

GaiaLens commissioned US investment market specialist Beresford Research to conduct this CATI (computer-assisted telephone interviews) study, which garnered responses from 200 of the largest asset owners. 100 of these respondents were based in the United States and another 100 in Western Europe, including the United Kingdom.

28% of the sample had assets under management (AUM) of $500 billion or more; 22% had assets under management of $250-499 billion, 26.5% had assets under management of $100-249 billion, and 23.5% had assets under management of $10-99 billion. Total estimated assets under management represented by the 200 largest asset owners in Western Europe and the United States was $50.7 trillion.

50.5% invested on behalf of large companies; 30.5% for pension plans; 10.5% for public/government plans; 3.5% for endowments and 3% for foundations.

Analysis of respondent job titles revealed that 52.5% were chief investment officers (CIO), 24% were sustainability managers, and 23.5% were ESG integration managers. All respondents confirmed that their organizations had “integrated ESG factors into your investment decision-making processes”. Respondents completed 26 survey questionnaires between December 7, 2021 and January 10, 2022.

About GaiaLens

GaiaLens offers a data-driven, transparent and real-time ESG rating analysis platform for institutional investors. GaiaLens compiles and analyzes structured and unstructured datasets, as well as traditional financial datasets to ensure that all ESG-relevant data on approximately 16,000 public companies is collected, measured for consistency and transparency , and scored in real time across the E, S and G Pillars.

GaiaLens uses machine learning to design innovative features such as diversity metrics and uses natural language processing to analyze and absorb news feeds into its analytics platform. In this way, it goes deeper and deeper than traditional analyst-led ESG rating systems.

GaiaLens is a group of finance professionals, technologists and academics who believe that creating economic value can and should be combined with environmental stewardship, social inclusion and good governance.​