Institutional investors leading ESG revolution, says report

Several factors and trends are driving an increase in responsible investments

Institutional investors leading ESG revolution, says report

ESG investing is taking a turn for the mainstream as more and more investor dollars are being devoted to strategies that seek positive change, according to a new report.

“[T]he volume of assets under management (AUM) that involve ESG strategies almost doubled between 2012 and 2016, rising from USD 13 trn to USD 23 trn,” said the report, titled Going mainstream: The Future of ESG Investing, citing figures from the Global Sustainable Investment Alliance (GSIA).

Referring to more figures from the GSIA, co-authors Harry Hummels and Rob Bauer from the University of Maastricht reported that the global sustainable investment market grew by 30% from 2014 to 2016, with sustainable investing strategies holding a 26% share of the global market AUM at the end of the period. In Canada, assets in such strategies grew by 49% from 2014 to 2016, ending with a 38% slice of the Canadian market’s assets.

Behind the increase is a growing adherence to the UN Sustainable Development Goals (SDGs) and Paris Agreement on climate change, which were ratified and signed in 2015. In the European Union, more regulations and standards are being put in place to bring financial targets more in line with sustainable development ones; institutional investors in different markets, like sovereign wealth funds (SWFs), are also taking more active roles in pushing for ESG policy and investment.

“Last year Japan’s SWF announced it would be allocating a substantial 10% to ESG investments,” the report said. “The funds of Norway, South Korea and Canada already integrate ESG-information in their decision-making, while a number of the world’s largest pension funds also engage with investees on ESG issues.”

Through a survey of 281 asset managers and owners around the world, the report found four main strategies that ESG information was being employed in the investment process:

  • Corporate engagement (used by more than eight out of 10 respondents);
  • ESG integration, or use of ESG factors in financial analysis of investments (used by more than three out of every four respondents);
  • Negative screening (used by around three out of four investors); and
  • Positive screening/impact investing (used by three out of four investors)

While positive screening is prevalent, the study noted that it’s likely done only at an instrument or index level, as opposed to direct investments in projects or companies expected to deliver positive social or environmental changes. “Just 1% of assets under professional management that follow ESG principles are estimated to be involved in impact investing,” the authors wrote, basing their estimate on 2016 numbers from the Global Impact Investing Network (GIIN) and the GSIA.

The survey also asked respondents to select potentially harmful industries that they expect to have divested from by 2030. More than half said they expect to cease investments in nuclear weapons (59%), tobacco (57%), fossil fuels (54%), and adult entertainment (52%); less than half cited gambling (40%), oil-based chemicals (43%), and alcohol (40%).