Asset Owners Struggle With Widespread ESG Investment Realignment

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

Published: Tuesday, April 5, 2022 - 12:00

(GaiaLens: London) -- Some 60 percent of the largest U.S. and Western Europe-based asset owners, which together represent assets under management of $50.7 trillion, are already building dedicated environmental, social, and corporate governance (ESG) portfolios; more than half (55%) are offering ESG fund options.

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

Negative screening hitting tobacco and weapons manufacturers hardest 

Furthermore, less than a quarter (22%) are directly addressing shareholders’ ESG concerns through increased dialogue with them on the topic. Just 13 percent of asset allocators have applied negative screening of certain types of investments or sectors; just over 18 percent have already divested out of certain sectors they no longer wish to be associated with. Among those using negative screening, nearly three-quarters (73%) were screening out tobacco companies, and 69 percent were screening out weapons/defense equipment suppliers.

Healthcare biggest winner from positive screening

Approximately one in six (15%) asset owners are applying positive screening techniques as part of their ESG realignment work. The biggest winner was healthcare stocks: 83 percent of the firms applying positive screening are favoring healthcare sector investments, while 72 percent are screening in stocks that are “good for the environment.” Interestingly, 88 percent of European asset owners favor environmentally sound stocks, whereas just half of U.S.-based asset allocators favored green investments.

More than a third don’t believe ESG realignment can deliver higher returns

U.S.-based asset owners remain more skeptical about whether ESG investment realignment can deliver higher returns than prior benchmarks, at least in the short-term: a third (33%) of U.S.-based, asset owner senior decision-makers and CIOs believe ESG adoption is negatively affecting returns. However, just over half that number (17%) among Western Europe-based decision-makers believe this.

A further 9 percent of decision-makers remained unsure of whether higher returns could be achieved through ESG realignment. Taken together, the higher returns through ESG-realignment skeptics averaged 34 percent across all 200 CIOs and senior decision-makers questioned in early January 2022.

Data quantity, quality, and scoring consistency key concerns in measuring ESG performance

Gaps in providing public companies’ social and environmental performance records remains the top concern for CIOs tasked with determining the ESG performance of the organizations they select for investment. An average of 36 percent of asset owners (40% in Western Europe and 32% in the U.S.) registered this data gap as a primary concern for them. CIOs were asked to only give their top-three concerns associated with assessing ESG performance accurately.

Nearly as many, an average of 32 percent, were concerned about their inability “to probe causal relationship between ESG performance and financial performance.“ This concern was raised as a principal concern by 40 percent of the 100 U.S.-based CIOs and senior decision-makers questioned.

Well over a quarter, 27 percent, included “lack of standardization for weighting and measuring ESG performance” of corporations in their top three concerns. This was a primary concern for 29 percent of CIOs of Western Europe-based asset owners.

Nearly a quarter (22%) of asset owners considered “accuracy of existing ESG scoring and rating systems” to be a top-three concern. Again, in Europe this was a slightly more significant concern, with 23 percent of CIOs there putting accuracy of scoring and ratings systems as a primary concern.

Just one in five (21%) of asset owners recorded that they were happy that they had “a strong handle on [their existing] ESG scoring and ratings” systems.

Automatic ESG risk-flagging needed

When asked what capabilities asset owners most wanted to obtain, 59 percent of CIOs signaled that they needed “to be able to screen and monitor portfolios of investments and flag companies with high ESG risk exposure” as a top priority. Two-thirds (65%) of CIOs based in Western Europe put this in their top two, indicating that this was either “central to our needs” or “considerably important.”

Nearly as important was the ability “to weight and customize any ESG scoring system we use,” according to pre-agreed investment strategy and priorities. An average of 57 percent of asset owner senior decision makers considered this “central to our needs” or “considerably important.”

Drill-down capability requested by more than half of asset owners

Not far behind in importance was the potential to drill down to see raw scores within each of the E, S, and G pillars and features within those pillars: An average of 54 percent of asset owners regard this drill-down capability as central to their needs or considerably important.

On average, just over half (54%) of asset owners regard “hybrid metrics which provide causal relationship linkage between ESG performance and longer-term financial performance” as “central to our needs” or “considerably important.” In Western Europe 59 percent of asset-owner ESG decision-makers regard 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 comprehensive study of CIOs in the largest asset owners across public, corporate, pensions, sovereign wealth fund, endowment, and foundation investing based in Western Europe and the U.S., confirm our anecdotal findings that asset owners are struggling to build the systems to support the massive task of realigning their portfolios to reflect the rapid transition to ESG-friendly investments.

“The speed of this transition has meant that the application of robust systems, processes, due diligence, as well as the application of ESG rating and scoring, and gathering of sufficient data to feed these systems is patchy at best, and wholly lacking in some areas.

“To put it simply, the application of ESG-linked data gathering, scoring, and analysis systems by asset owners is playing catch-up. There’s widespread evidence of data gaps and scoring inconsistencies. We fully intend to revisit progress in these areas in a year’s time to see how much has changed.”

About GaiaLens study

GaiaLens commissioned U.S.-based investment-market specialist Beresford Research to complete this CATI (computer-assisted telephone interviewing) study, which gained responses from 200 of the largest asset owners. 100 of these respondents were based in the United States, and a further 100 from Western Europe, including the United Kingdom.

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

50.5 percent were investing on behalf of major corporates; 30.5 percent for pension schemes; 10.5 percent for public/government schemes; 3.5 percent for endowments, and 3 percent for foundations.

Analysis of respondents’ job titles revealed that 52.5 percent were chief investment officers (CIOs), 24 percent were heads of sustainability, and 23.5 percent were heads of ESG integration. All respondents confirmed that their organizations had “incorporated ESG factors into your investment decision-making processes.” Respondents completed 26 question survey questionnaires between Dec. 7, 2021, and Jan. 10, 2022.

About GaiaLens

GaiaLens offers a data-driven, transparent and real-time ESG scoring analytics platform to institutional investors. GaiaLens compiles and analyses structured and unstructured data sets, as well as traditional financial data sets to ensure that all ESG-relevant data on approximately 16,000 public companies are gathered, measured for consistency and transparency, and scored in real time across the E, S and G pillars.

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

GaiaLens is a group drawn from finance professionals, technologists, and academics who believe that economic value creation can and should be combined with environmental stewardship, social inclusion, and sound governance.​

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