Asset Owners Continuing to Increase Allocations to ESG Investments Despite Growing Challenges: Morningstar

Asset owners are increasing allocations into strategies that integrate ESG factors, despite reporting growing regulatory and data quality barriers to ESG implementation, according to a new survey released by investment research firm Morningstar.

For the report, “Voice of the Asset Owner Survey 2023,” Morningstar surveyed 500 asset owners, including pension funds, insurance general accounts, family offices and outsourced CIOs in countries across North America, Europe and Asia Pacific, with combined assets of more than $10.7 trillion.

The survey found that all asset owners are allocating at least a portion of their assets to strategies that take ESG factors into account, and that the proportion that have at least half of their assets in such strategies has increased to 34% from 30% since the 2022 survey. By region, 46% of asset under management are now allocated to strategies that apply ESG considerations, compared to 41% in APAC and only 36% in North America.

The increase in ESG allocation reflects the growth in perceived importance of ESG factors by asset managers. According to the survey, 67% of asset owners reported that ESG has become more material over the past five years, and 52% said that environmental factors in particular have become more material over the past year alone. Similarly, more than half of asset managers said that environmental and social factors including net zero emissions (52%) and diversity and inclusion (57%) are material to investment decisions.

Asset owners’ increasing allocation to ESG strategies, however, also comes as they report growing barriers to ESG implementation. Following a period of strong performance in the carbon intensive energy and utilities sectors, the top challenge to pursuing an ESG investment strategy, reported by 38% of asset owners in 2023 was the impact on returns, up slightly over last year’s survey. Data-related challenges have grown significantly, according to the survey, with 30% of asset owners reporting a lack of standardized data as a barrier to an ESG investment strategy, and 29% citing unreliable or out-of-date data, compared to 15% who reported each of these issues as a challenge in the prior year.

Regulatory factors also saw a significant increase as a challenge to ESG investing, with around 30% of asset managers reporting regulation as a barrier, up ten percentage points over the past year. Fewer than half of asset owners (49%) reported that they find ESG regulations helpful, down significantly from 60% in 2022, while 28% say that regulations serve as a hindrance, up from 25%. Among those reporting regulation as a hindrance, a lack of clarity emerged as the top pain point, with 42% responding that ESG regulations are confusing or unclear, up from 29% last year.

Thomas Kuh, Head of ESG Strategy at Morningstar Indexes, said:

“The second Morningstar Voice of the Asset Owner survey confirms that institutional investors remain highly committed to integrating ESG factors into their global investments, but challenges related to lack of regulatory clarity and the need for better data and resources continue to persist.”

The report also examined asset managers’ usage of resources for managing and measuring ESG risks and opportunities, such as ESG ratings, indexes, data, and tools. Overall, these products and services appear to have improved recently, with nearly two thirds of asset owners reporting that ESG data (63%), ESG ratings (64%), ESG indexes (65%) and ESG tools (66%) have gotten better over the past five years. When asked which improvements in these solutions would benefit them the most, 48% of asset owners said that more accurate data, followed by 42% who want more timely data.

The survey also found that asset owners expect artificial intelligence to significantly impact ESG investing, with 70% expecting AI adoption to increase for data collection and 67% for ESG analysis.

Arnold Gast, ESG Research Director at Morningstar Sustainalytics, said:

“As stewards of some of the largest pools of global capital, asset owners have stayed anchored to their fiduciary duty despite a range of challenges related to ESG market data, regulatory confusion and market performance. As their job becomes increasingly complex, asset owners continue to raise their expectations of a range of key stakeholders to provide better insight, research, data and tools to address the evolving sustainable investment landscape.”

Click here to access the report.