While incorporating ESG factors into investment processes is more widespread in other parts of the world, U.S. institutional investors are starting to catch up, according the Callan's seventh annual ESG survey released Wednesday.
Some 42% of U.S. survey respondents said they incorporated environmental, social and governance factors into their investment process this year, up from 22% in 2013.
Integrating ESG factors into all investment decisions also grew in 2019, with 51% of institutional investors that incorporate ESG doing so, as opposed to using separate allocations, negative screening and other approaches to ESG. Data from 2013 wasn't available.
"There is still a wide range of how to implement it," said senior vice president Anna West, senior vice president, ESG practice leader and author of a report about the survey, in an interview. In the U.S., the approach tends to be on improving investment outcomes by focusing on financially relevant information, and then deciding where more can be added through engagement and other methods. Investors "are using all of the potential implementation tools," Ms. West said.
The survey of 89 investors, including Callan clients, from May to July defined ESG factors as socially responsible investing (including divestment), sustainable investing, responsible investing, impact investing and other associated terms.
The percentage of public pension plans incorporating ESG in 2019 grew to 49% from 15% in 2013, while corporate plans showed less interest at 19%, up from 14%. Foundations and endowments have typically led in ESG incorporation, but that rate dipped to 44% from 64% in 2018, with a common reason being that they focused on pure financial factors in the investment decisions.
"We do see very divergent trends by fund type," Ms. West said.
Organizations with more diversity on their board were more likely to incorporate ESG into investment decisions, the survey found.
The way investors define ESG is starting to come into better focus, she said. "The No. 1 answer was that they consider ESG factors with every investment manager search and selection," Ms. West said. Investors are also relying more on investment managers and consultants to help define ESG goals and implementation strategies, "so there is an opportunity to provide education and have a concise message," she added.