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Callan: More U.S. asset owners incorporating ESG factors into investment decisions

A growing number of U.S. asset owners have incorporated environmental, social and governance factors into their investment decisions since 2013, said Callan Associates' fifth annual ESG survey, released Thursday.

Across all plan types, 37% of survey respondents reported incorporating ESG factors into their investment decision-making, up from 22% in 2013, the year the survey was first conducted. On the flip side, 60% of funds said they did not incorporate ESG factors in 2017 and 3% said they were unsure.

Since the survey's inception, large plans with $20 billion or more in assets have been the highest adopters of ESG investing. In 2017, 78% of the largest plans reported incorporating ESG factors, up from 71% in 2016 and 33% in 2013. By comparison, 30% of funds with $500 million or less in assets said they incorporated ESG factors, compared to 39% in 2015 and 20% in 2013.

By plan type, foundations and endowments continue to be the highest adopters of ESG investing at 56% and 39%, respectively, in 2017, compared to 48% and 53% in 2016, and 31% and 22% in 2013. Public funds followed foundations and endowments at 35%, up from 25% in 2016, and 15% in 2013. Corporate plans came in at 25%, down from 30% in 2016 and up from 22% in 2013. Foundations have been the highest adopters of ESG investing in four out of the five years Callan has conducted the survey.

While ESG adoption has increased in aggregate since 2013, the 37% reported in 2017 is unchanged from 2016, this year's survey found. Callan attributed the plateau in adoption rates to changes in survey respondents over time and fewer respondents this year who said they have not yet incorporated ESG factors but consider doing so in the future (7% in 2017 vs. 22% in 2016).

Other findings from Callan's 2017 survey include:

  • Adding language to the investment policy was cited once again as the top implementation method for incorporating ESG factors, according to 50% of respondents (compared to 53% in 2016). That was followed by communicating to money managers that ESG is important to the plan, hiring a manager/strategy that integrates ESG, and implementing a screening process, according to 42% of respondents each.
  • The top reason cited for ESG incorporation was fiduciary duty, according to 47% of respondents, followed by the fund's investment policy dictating it (42%), and expectations to achieve an improved risk profile or "other" (32% each). Other reasons cited were "participants desire to incorporate"; "we believe it is an important attribute for certain generations of participants"; and "mission alignment with our organization."
  • The top reason cited for not incorporating ESG factors was the fund does not consider factors that are not purely financial (41%), the value proposition is unclear (39%), and a lack of research tying ESG factors to outperformance (38%). Callan noted that the percentage of funds that believe the value proposition is unclear is down from 63% in 2016 and 53% in 2013.

Callan surveyed 105 asset owners, representing more than $1.1 trillion in combined assets, in August.