Institutional investors have focused on ESG for many years, but the industry may be reaching a tipping point in terms of the specificity and sophistication of ESG mandates. Against a backdrop of increasingly hard to ignore climate risks and social unrest brought on by the COVID-19 pandemic, the death of George Floyd and the war in Ukraine, institutions are moving away from passive exclusion strategies and leveraging new data to engage with management teams, set specific goals and measure impact.
Indications of these shifts are already underway. Thomas Shingler, Summit, N.J.-based senior vice president and ESG practice leader at consultant Callan LLC, said investors may individually be at different places on their environmental, social and governance journey, but broadly nearly all of them are engaged in data gathering, thinking through best practices and/or working through how to implement investment approaches that are measurable and provide value.
“The goals of each investor are going to be unique, mandates are going to be different relative to the size and flexibility of a given plan,” Mr. Shingler said. “There are large public plans that have very large, very sophisticated investment programs. They can use their own investment staff or design a custom mandate. For small to medium plans, or ERISA plans, it’s going to be a different process. We also work with some investors that are religious organizations that are thinking about ESG from that perspective and are trying to align their portfolios accordingly.”
Money managers reported a total of $28.03 trillion in global assets managed under ESG principles as of Dec. 31, according to Pensions & Investments’ money managers survey, up 21.9% from the year before and up 415% from five years earlier. Worldwide ESG mandates totaled $3.59 trillion, up 22.7%.
According to data from Morningstar Inc., investors are pouring billions of dollars into ESG strategies even during periods of market stress when asset flows as a whole have declined. But how they expect that money to be put to work is changing. To differentiate in ESG now means being able to demonstrate not just positive financial performance but in-depth expertise on what the transition to a sustainable economy means and how that impacts portfolios on an ongoing basis.