Asset owners are increasingly incorporating ESG factors into their investment decisions with climate emerging as a major focus, according to a soon-to-be released survey by Morningstar Indexes and Sustainalytics.
Over the last three years that Morningstar executives have conducted the two-phase research, climate has ascended as “the driving force of sustainable investments,” said Thomas Kuh, head of ESG strategy for Morningstar Indexes.
“What that means is a couple of things... that a singular focus on ESG is receding a bit as climate sort of drives the narrative and the strategies,” Kuh said in an interview. “It doesn’t mean that ESG is going away. It’s more of a secondary factor.”
The findings are the result of qualitative discussions with 13 asset owners, which is the first phase of the process, “Voice of the Asset Owner Survey 2024” that will in phase two include a questionnaire to be sent to around 500 asset owners including pension funds, insurance general accounts, outsourced CIOs and family offices.
The anti-ESG political sentiment that is particularly relevant in the U.S. has had a chilling effect on asset owners’ investing through an environmental, social and governance lens, but it is hard to gage to the extent that is true, Kuh said.
In the first quarter, flows into U.S. sustainable funds were negative for the first time since Morningstar has been tracking this information, whereas flows were positive in Europe, according to Morningstar’s latest research tracking flows into sustainable funds, which is separate from the "Voice of the Asset Owner" survey.
The sustainable fund survey tracks flows of global open-end funds and ETFs focused on impact, sustainability, or ESG risk factors.
The political “noise” around ESG has also caused asset owners to be more cautious with “a number of U.S. pension plans being forced by the political process in their states to change managers, for example,” Kuh said.
“As a general rule, the investment staff of public pension funds don’t really look forward to political interference” because it impinges on their fiduciary duty, he said.
Phase one of the survey revealed that biodiversity is growing in importance as a climate-related factor, Kuh said. Biodiversity is an issue that Morningstar researchers began hearing about last year but think could emerge in phase two as a material climate-related category came up again in the latest qualitative survey, he said.
