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Investing

ESG adoption gaining among U.S. asset owners – Callan survey

More than 40% of U.S. asset owners have incorporated environmental, social and governance factors into their investment decisions, up from 37% in 2017 and 22% in 2013, said Callan's annual ESG survey report, released Wednesday.

The 43% of respondents reporting they have incorporated ESG factors is the highest level in the survey's six-year history.

On the flip side, 54% of respondents said they do not incorporate ESG factors and 3% said they were unsure, the 2018 survey found.

Among the survey's respondents, foundations continue to be the highest adopters of ESG investing by plan type. In 2018, 64% of foundations reported incorporating ESG investing, up from 56% in 2017, followed by endowments at 56% (vs. 39% in 2017); public plans, 39% (up from 35%); and corporate plans, 20% (down from 25%). Foundations have been the highest adopters of ESG investing in four out of the six years the survey has been conducted.

Large plans, those with more than $20 billion in assets, continue to be the highest ESG adopters by plan size. In 2018, 72% of the largest plans reported incorporating ESG factors, down from 78% in 2017, but up from 33% in 2013, the first year the survey was conducted. That compares to 47% of funds with less than $500 million that said they incorporated ESG factors, up from 30% in 2017 and 20% in 2013.

This year's survey also found that 40% of public and corporate defined benefit plans reported incorporating ESG investing, compared to only 13% of defined contribution plans.

For DC plans that offer ESG-focused options, pickup tends to be low at just 1% of total assets, the survey found.

In a Tuesday webinar on the survey results, , Anna West, a senior vice president at Callan, co-manager of the firm's published research group and author of the survey report, said regulatory uncertainty around ESG incorporation in DC plans could be giving some plan sponsors pause.

Other findings from the 2018 survey include:

15% of survey respondents that are not currently incorporating ESG factors plan to do so in the future (compared with 7% in 2017).

Considering ESG factors with every investment/manager selection and communicating to investment managers that ESG is important to the plan were each cited by 55% of respondents as the top implementation methods for incorporating ESG factors, compared to 42% each in 2017. (Multiple responses were allowed.)

The top reasons cited for ESG incorporation were expectations to achieve an improved risk profile, according to 42% of respondents, up from 32% in 2017, followed by fiduciary responsibility and goals besides risk-adjusted returns at 34% each (compared to 47% and 26%, respectively, in 2017). The first two reasons resonated the most with public plans this year, the report said.

The top reasons cited for not incorporating ESG factors were the plan does not consider factors that are not purely financial, according to 52% of respondents, up from 41% in 2017, followed by lack of research tying ESG to outperformance (48%, up from 38%) and an unclear value proposition (21%, down from 39%). The first two reasons resonated the most with corporate plans, the report said.

39% of respondents that have already incorporated ESG factors plan to broaden their scope going forward. There was no further detail.

36% of all respondents would like to see more U.S. equity-focused ESG options, followed by global equity, 25%; and emerging markets equity, 24%.

The full survey is available on Callan's website.

Callan surveyed 89 U.S. asset owners in May.