Environmental, Social and Governance (ESG) issues are increasingly taking centre stage as institutional investors exert their influence to channel more funds towards investments that deliver measurable impacts along with improved long-term financial returns.
Our ESG Global Survey 2019 reveals a stronger commitment to responsible investing since the previous survey conducted two years ago. The majority of respondents from among 347 asset owners and managers expect ESG fund allocations to increase further in the next two years. While data and costs remain the biggest barriers to integrating ESG into investment decision-making, organisations are planning to invest more in technology and hire specialists to overcome the challenges.
About 75% of asset owners and 62% of asset managers surveyed allocated more than a quarter of their funds towards ESG, up from about 50% in 2017. More than 90% are targeting similar allocation levels over the next two years, aligning investment frameworks more closely with the United Nations Sustainable Development Goals (SDGs). Asia Pacific remains more bullish on ESG integration than the rest of the world: 55% of respondents from the region are looking to park at least half of their investments in funds incorporating ESG, compared to 49% globally.
Rewards: better risk-adjusted returnsThere is a growing belief in the link between incorporating ESG into investment decision-making and better risk-adjusted returns, while local regulators are beginning to implement their own ESG frameworks.
Assets professionally managed under responsible investment strategies have surged 34% since 2016 to $30.68 trillion, according to the latest review by the Global Sustainable Investment Alliance. More than half (52%) of respondents rank improved long-term returns as the top reason for incorporating ESG in investment decisions, with 60% expecting their ESG portfolios to outperform over the next five years.
Challenges: data and costsThe lack of robust data (66%) and technology costs (32%) not only remain the biggest barriers to ESG integration but have also become more acute. In 2017, 55% cited data availability and 16% regarded costs as the main hurdles. While there is a proliferation of ESG data, a lack of consistency and conformity, coupled with a dearth of advanced analytical skills hinder credible comparisons across data sets.
However, many organisations are proactively upgrading technology and are either developing or acquiring the skills required for integrating ESG in decision-making. Smart technologies for data aggregation, big data analytics, ESG reporting and benchmarking have the capability to take ESG to the next level by giving investors the right tools to assess the performance and sustainability of investee companies more accurately. As a result, more than a third of respondents (34%) say they are investing time and resources in developing proprietary systems over the next two years.
A cultural shift towards a company-wide ESG visionWhile there is a clear drive to align investment strategies with SDGs, organisations still have a long way to go before fully embedding these across their functions. Only one in four (26%) of respondents feel that their organisation is currently able to integrate ESG strategies across all aspects of their operations.
However, this is changing. There is a growing recognition of the need to build a diverse talent pool capable of offering fresh perspectives in order to integrate ESG capabilities across organisations. While many organisations tend to have a dedicated ESG resource in their investment teams, a cultural shift is underway to embed such capabilities more widely, with 39% of respondents planning to strengthen ESG practices across their own operations over the next 12 months. Those with a company-wide ESG vision are more optimistic about future allocations: 62% of them expect to dedicate 50% to 75% of their investments over the next two years in funds that incorporate ESG.
The practice of building ESG capabilities in-house is shifting to hiring professionals from non-traditional backgrounds, such as non-governmental organisations. Over the next 12 months, close to a third (29%) of respondents expect to hire new ESG talent from non-traditional backgrounds and 34% plan to either hire or increase the number of external ESG specialists.
The coming two to five years will witness the next wave of ESG integration. That means the laggards are running out of time to get the right structure, leadership and skills in place and embed ESG principles across their organisations.