Integration of environmental, social and governance factors is moving toward the mainstream of institutional investment management.
But users lack agreement on factors, weightings, scoring, standards and definitions, as well as application into investment analysis.
A combined 1,380 investment managers, asset owners and other investment-related organizations worldwide representing $59 trillion in assets had signed the United Nations-supported Principles of Responsible Investment as of April 2015, according to PRI's latest numbers. Those figures are up 9.5% and 31.1%, respectively, from April 2014.
Signatories agree to implement a voluntary set of six principles incorporating environmental, social and governance factors into investment decision-making and ownership practices.
In its latest biennial report released last year, the Global Sustainable Investment Alliance — a coalition made up of the US SIF Forum for Sustainable and Responsible Investment and other responsible investment associations worldwide — showed assets under management incorporating sustainability investment strategies reached $21.1 trillion globally at the beginning of 2014, up 61% from the beginning of 2012.
“The mainstream is just getting their heads around” ESG, said Ben Yeoh, London-based senior portfolio managers, global equities, RBC Global Asset Management.
Noted Alex Bernhardt, Seattle-based principal, U.S. responsible investment leader, Mercer LLC: “If it's not mainstream now, it's trending that way for sure. Everyone knows what the acronym stands for now. That's progress. In that sense, yes, we are mainstream.”
But “to the extent that ESG factors are integrated into every investment process or investor decision, we are far from that point.
“All the indicators we track are pointing toward more sustainable or responsible investing and not less,” Mr. Bernhardt added. “I don't see this leveling out anytime soon.”
Heather H. Myers, New York-based managing director, non-profits, Russell Investments, was a bit more cautious. “I wouldn't say it's mainstream yet,” she said. “But it's certainly being talked about a lot more than it was a couple of years ago. ... A lot of asset owners, if they haven't moved there (to ESG) yet, what they really want to figure out is how does (ESG) work for them.”
Large institutional investment managers increasingly are moving to ESG integration. Managers reported fully integrated ESG AUM at $4.8 trillion as of the end of 2014, up from $1.4 trillion at the end of 2012, according to a report covering 16 money managers released in October from US SIF Foundation.
The report defined integration as a systematic, explicit inclusion of ESG into traditional financial analysis.
“The next stage for money managers ... is to provide more disclosure around practices, specifically ESG criteria they consider and how they systematically apply integration” to allow institutional investors to better evaluate the use, Meg Voorhes, US SIF director of research and co-author of the US SIF report, said at the time the report was released.
Elsewhere, ESG integration is further advanced.
“Looking at Europe, a majority of fund mangers incorporate ESG,” said Ulrika Hasselgren, Stockholm-based managing director and head of sustainable and responsible investment, Institutional Shareholder Services Inc.
Drivers of ESG use come from asset owners, government regulation and stock exchange listing rules.
Some 29% of U.S.-based asset owners incorporate ESG risk factors into their investment decision-making, according to results of a Callan Associates Inc. survey released in November of 240 asset owners representing a combined $2.4 trillion in assets. That's up from 22% in 2013, the only other time Callan has done the survey.
“Clearly this (kind of pressure) is what we see all around Europe and to a growing extent in the U.S.,” said Ms. Hasselgren. “That of course pushes the fund mangers to integrate these issues and implement strategies that provide solutions.”
A CFA Institute survey of members, released in August, found 63% of respondents take ESG issues into consideration to help manage risk. Some 44% of respondents did so because of client demand.
“We are having so many more conversations with clients about these issues. It has really come up on their radar screens, whether it is in the U.S. or in Europe,” said Jessica Ground, global head of stewardship, Schroder Investment Management Ltd., London. “They are lot more interested. That has to do with millennials being more interested in this.”