Insights
Asset Owners See Sustainability as Core to the Future of Investing
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Sustainable Investing
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May 26, 2020
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May 26, 2020
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Asset Owners See Sustainability as Core to the Future of Investing |
Asset owners worldwide now routinely incorporate environmental, social and governance (ESG) factors in their decision-making. In a decisive shift toward the adoption of sustainable investing, four in five institutions surveyed are currently integrating ESG considerations into the investment process. Moreover, 57% foresee a time when they will only allocate to third-party investment managers with a formal ESG approach. These are among the key findings of Morgan Stanley’s second Sustainable Signals survey of institutional asset owners. As sustainable investing grows more sophisticated, asset owners also seek better tools and data to measure their social and environmental impact.
Download Full ReportThe survey results indicate that asset owners are adopting sustainable investing in record numbers. Eight in ten actively integrate ESG factors into the investment process across the board or in part of their portfolio—up 10 percentage points in two years. A further 15% are considering doing so. Not only is sustainable investing now mainstream, but 57% of asset owners foresee a near future where they will limit allocations to managers with a formal ESG approach. Among this group, 42% expect to change this selection criteria within two years and 39% within five years.
Many factors are fueling adoption. Frontrunners include constituent demand (81%), financial return potential (78%) and evolving policy and regulation on ESG disclosure around the world (76%). Asset owners who already practice sustainable investing identify clear benefits to reputation and stakeholder engagement, as well as improved environmental and social outcomes where measured.
Asset owners are eager to measure and report portfolio impacts, but nearly a third (31%) lack adequate tools to assess how investments align with their ESG goals. Overall, the lack of quality data is now viewed as the most significant barrier to sustainable investing. Asset owners are looking to third-party research and ratings, rankings and data providers to help fill these gaps, but may not be able to source the data they need given ongoing data quality challenges.
Close to half of asset owners polled (48 of 110) employ thematic or impact investment approaches. The top four issues they seek to address are environmental—climate change, water solutions, plastic waste and the circular economy. For social issues, gender diversity and education are the top priorities.
In this survey, sustainable investing approaches were defined as follows:
Exclusionary, negative or values-based screening of investments.
Proactively considering ESG criteria alongside financial analysis.
Pursuing strategies that address sustainability trends such as clean energy, water, agriculture or community development.
Seeking to make investments that intentionally generate measurable positive social and/or environmental outcomes.
Shareholder Engagement
Direct company engagement or activist approaches.
The rapid mainstreaming of sustainable investing presents a clear business opportunity for third-party investment managers. Two-thirds of asset owners (67%) want key stakeholders in their organization to learn more about ESG integration, impact investing and thematic investing. And more than eight in ten (86%) see a role for outside investment managers in portfolio reporting on ESG performance and in sharing expertise on approaches, issues and trends.