Sustainability Insight
Sustainable Signals
In a survey of institutional investors, 70% said they are integrating sustainable investing into their investment process, signaling just how quickly the ESG imperative is catching on.
 
 

Sustainability Insight

Sustainable Signals

 

Asset owners—pension funds, endowments, foundations and other large institutional investors—are embracing sustainable investing and viewing environmental, social and governance (ESG) factors as a way to proactively manage risk and returns. Of the $22.8 trillion invested sustainably, or $1 in every $4 under professional management, institutional investors own nearly 75%.1

The momentum for sustainable investing is high and asset owners are speaking louder than ever. In Japan, the Government Pension Investment Fund, the world’s largest pension with $1.3 trillion under management, announced last year that it would increase the ESG allocation of its equity holdings from 3% to 10%.2 Meanwhile, New York City announced in January, 2018, that it would divest its $189 billion public pension fund from fossil fuels in the next five years.3

Beyond pensions, other asset owners, including foundations, are rising to the occasion as well. In April 2017, the Ford Foundation announced a commitment of $1 billion of its endowment to mission-related investments.4

A recent survey from the Morgan Stanley Institute for Sustainable Investing and Morgan Stanley Investment Management finds continued growth and ample opportunity ahead. The survey, which gathered insights from 118 global asset owners, 60% of which had assets over $10 billion, finds that 84% are pursuing or actively considering pursuing ESG integration in their investment process. Of those, 60% began doing so in the last four years and 37% within the last two.


Most Asset Owners Are Integrating ESG Criteria Into Investment Process

Does your organization seek to integrate sustainable investing or ESG criteria into the investment process, including selection of third-party investment managers?

 


Most Asset Owners Have Been Integrating ESG for Less Than 4 Years

How long has sustainable investing or ESG criteria been integrated into your investment process?

 

 
Investors have become more sophisticated, viewing sustainability as a driver of returns and risk management. They are also adopting multiple approaches across their investments, with 78% rating risk management as an important factor driving sustainable investing at their organizations, and 77% saying that return potential was important.

Risk Management and Return Potential Are Leading Drivers

How important are each of the following factors in driving sustainable investing adoption at your organization?

 


Multiple Approaches to Sustainable Investing

Which of the following approaches to sustainable investing does your organization currently employ?

 

 
The UN's Sustainable Development Goals are gaining traction as an organizing framework, with 78% of asset owners saying that they seek to align their investments with them, or considering doing so.

UN's Sustainable Development Goals Gain Traction

Does your organization seek to address or align with any of the UN Sustainable Development Goals as part of its investment strategy?

 

 
There's plenty of room for growth: 77% of respondents agreed that they have a responsibility to address sustainability through their investments.

Asset Owners Feel They Have a Responsibility to Address Sustainability

To what extent do you agree or disagree with the following statement: "Asset owners have a responsibility to address global sustainability issues through their investments"

 

 
But proof of market-rate financial performance remains the top challenge (24%). Lack of tools and data is also a barrier. Only 42% feel they have adequate tools to assess sustainable investments.

Lack of Tools to Assess Sustainable Investments

Does your organization have adequate tools to assess the alignment of its investments with its sustainable investing goals?

 

Read more Sustainability Insights from Morgan Stanley Investment Management.

 
 

1. Institutional investors represent 74.3% of all sustainably managed assets in Canada, Europe and the U.S. This data was not collected in Australia/New Zealand or Asia. Canada, Europe and the United States account for $21.8 trillion of the $22.8 trillion total. Global Sustainable Investment Alliance, “2016 Global Sustainable Investment Review,” 2017.

2. Junko Fujita, Takashi Umkawa, Reuters, “Japan’s GPIF expects to raise ESG allocations to 10%: FTSE Russell CEO,” July 14, 2017 (https://www.reuters.com/article/us-japan-gpif-esg/japans-gpif-expects-to-raise-esg-allocations-to-10-percent-ftse-russell-ceo-idUSKBN19Z11Y; accessed May 16, 2018).

3. Laila Kearney, Reuters, “New York sues fossil fuel majors, plans divestment from pension funds,” January 10, 2018 (https://www.reuters.com/article/us-usa-municipals-fossilfuels/new-york-sues-fossil-fuel-majors-plans-divestment-from-pension-funds-idUSKBN1EZ2Q2; accessed May 16, 2018).

4. Ford Foundation, “Ford Foundation commits $1 billion from endowment to mission-related investments,” April 5, 2017 (https://www.fordfoundation.org/the-latest/news/ford-foundation-commits-1-billion-from-endowment-to-mission-related-investments/; accessed May 16, 2018).

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The returns on a portfolio consisting primarily of Environmental, Social and Governance (“ESG”) aware investments may be lower or higher than a portfolio that is more diversified or where decisions are based solely on investment considerations. Because ESG criteria exclude some investments, investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria.

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