The impact of ESG factors on investment decisions and risks, and the perceived opportunity to generate better returns, is growing, according to a Russell Investments survey and a BNY Mellon Investment Management study released Monday.
Russell Investments surveyed more than 300 active management firms across equity, fixed income and private markets and found that 55% of respondents allow material ESG considerations to drive investment decisions. Of those, 36% said they were initially motivated to integrate ESG considerations by the opportunity for superior risk-adjusted returns, compared with 28% saying so in the 2018 survey.
The survey found governance still the most important ESG component for 86% of respondents, with 48% more saying in the 2019 survey than 2018 that they always incorporate ESG matters in regular meetings with management.
When it comes to their own approach to ESG, 82% reported having a formal investment policy, up from 26% in last year's survey, with much of the increase coming from smaller sized firms with $30 billion or less in assets under management.
Roughly 80% of firms with AUM greater than $50 billion have professionals spending more than 90% of their time on ESG-specific matters.
The survey also found that firms are increasingly leveraging quantitative ESG data in their investment process, with 73% of respondents combining qualitative and quantitative data for their ESG-specific insights.
The most common external quantitative ESG data providers are MSCI, Bloomberg, Sustainalytics and ISS/oekom, while only 21% of respondents rely solely on qualitative data from sources, including direct engagement, company reports, regulatory filings and external vendors.
A research study conducted by BNY Mellon Investment Management and CREATE-Research found that 93% of institutional investors with a combined $12.75 trillion in assets under management consider climate change an investment risk that is not yet priced into all global financial markets. Of those, 57% view it as a risk and an opportunity, and 36% consider it only a risk. The investors reported intensive engagement with companies, increasing investment in green bonds, and factoring in the potential for draconian measures.
The study report, "Future 2024: Future proofing your asset allocation in the age of mega trends," describes climate change and artificial intelligence as "supertanker" trends that 89% of interviewees regarded as investment risk.
On artificial intelligence, 85% consider it an investment risk, with 52% of them seeing it as both risk and opportunity, and 33% seeing only risk. Investment challenges related to AI include shorter corporate life cycles as AI creates winners and losers; blurring of sectoral boundaries; a shift from emerging economies to onshore manufacturing, and more difficult asset valuations.
BNY Mellon Investment Management CEO Mitchell E. Harris said in a statement that the study highlights "two shifts that stand out within asset allocation — the move to passive from active and to private markets from public markets.
"We believe passive will be raising their share of core assets, while active will be focusing on satellites that dominate either inefficient or illiquid markets. The separation of alpha and beta is structural, but the two styles of active and passive investing will remain interdependent," Mr. Harris said.
The study relied on two strands: a literature survey of about 400 widely respected research studies; that was bolstered by in-depth, structured interviews with 45 CIOs, investment strategists and portfolio managers among pension plans, asset managers and pension consultants in 16 countries — Australia, Canada, China, Denmark, Finland, France, Germany, India, Japan, Singapore, South Korea, Sweden, Switzerland, the Netherlands, the U.K. and the U.S.
