Research reveals positive outlook as exclusionary and positive screening strategies take hold among majority
The historically high demand for ESG strategies among institutional investors is set to persist over the coming years, according to a new report from Cerulli Associates.
In a survey of asset managers, Cerulli found more than half expect high demand from non-profit institutions in the next two to three years. Expectations were especially high for foundations and endowments, which have historically displayed great interest in ESG, with 98% of respondents predicting moderate to high demand for both segments.
“A growing percentage of investors (50%) believe they are not meeting their fiduciary duty if they do not take long-term ESG risks into consideration,” the report said. “Another top reason … is to reflect stakeholder interests, including those of board members, donors, and students.”
Looking into asset owners’ ESG processes in making investments or selecting investment managers, Cerulli found 59% have an ESG integration strategy, 53% perform positive screening based on strong or improving ESG factor performance, and 47% do negative screening.
Among the asset-management firms that professed to do exclusionary screening, just over seven tenths said they exclude tobacco (72%) and firearms/weapons (71%); two thirds reportedly avoid gambling (66%); and just over half said they exclude companies involved in opioids (59%), adult entertainment (57%), and alcohol (54%).
Other popular criteria for divestment were animal welfare/testing (45%), nuclear power (42%), and fossil fuels (41%).
Cerulli reported that on average, screening products represent the largest percentage of institutions’ total responsible investment allocation at 32%. Impact investing and sustainability themed products, on the other hand, account for one quarter of asset owners’ total responsible investment allocation.
But that balance is likely to shift. “A growing percentage of investors seek strategies that offer value enhancement rather than aligning their values through negative screening products,” Cerulli said. That’s in line with the fact that clients, prospects, and third-party allocators are reportedly sending more due diligence questionnaires, requests for information, and requests for proposal to get ESG-related information, especially within the past two years.
With more institutional investors starting to discuss how to incorporate ESG considerations at board and investment committee meetings, Cerulli advised asset owners to avoid boilerplate ESG investment policy language when designing their ESG objectives.
“Cerulli encourages asset owners to carefully evaluate the benefits, costs, and potential risks of different approaches prior to drafting ESG objectives,” the report said, noting the importance of taking spending policy, return targets, risk profiles, and other unique priorities into account.